Understanding SMART Procurement in the MOD (Hawksmere Report)

U UNDERSTANDING SMART PROCUREMENT IN THE MINISTRY OF DEFENCE Tim Boyce IFC A Hawksmere Report UNDERSTANDING SMART...

Author: Tim Boyce

34 downloads 786 Views 312KB Size Report

This content was uploaded by our users and we assume good faith they have the permission to share this book. If you own the copyright to this book and it is wrongfully on our website, we offer a simple DMCA procedure to remove your content from our site. Start by pressing the button below!
Report copyright / DMCA form

DOWNLOAD PDF

U

UNDERSTANDING SMART PROCUREMENT IN THE MINISTRY OF DEFENCE

Tim Boyce

IFC

A Hawksmere Report

UNDERSTANDING SMART PROCUREMENT IN THE MINISTRY OF DEFENCE

Tim Boyce

Published by Hawksmere plc

Other Hawksmere Reports:

12-18 Grosvenor Gardens London SW1W 0DH. www.hawksmere.co.uk

Negotiating with the Ministry of Defence

© Tim Boyce 2000

Tim Boyce

All rights reserved. No part of this

Tendering for MoD Contracts Tim Boyce

publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying, recording or otherwise, without the prior

Software Contracts

permission of the publisher.

Robert Bond

New Media in Corporate Communications Mic Cady

This Report is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher’s

Managing Reputation in Cyberspace David Phillips

prior consent in any form of binding or cover other than in which it is published and without a similar condition including

Internal Communications

this condition being imposed upon

James Farrant

the subsequent purchaser.

New Ways of Working

No responsibility for loss occasioned to

Stephen Jupp

any person acting or refraining from action as European Lobbying Guide

a result of any material in this publication can

Bryan Cassidy

be accepted by the author or publisher.

The Internet as a Business Tool

A CIP catalogue record for this Report

Brian Salter and Naomi

is available from the British Library.

Langford-Wood

ISBN 1 85418 164 5 Printed in Great Britain by Printflow Limited.

The author Tim Boyce has worked in the defence business in both public and private sectors for twenty-five years. He spent six years in the MoD Procurement Executive and the subsequent time in a number of defence and aerospace businesses including Plessey and Siemens.He is currently a Commercial Director within BAE Systems. He is a member of the Chartered Institute of Purchasing and Supply and the CBI Defence Procurement Panel.He has worked in a number of MoD/CBI policy groups including those dealing with contractor incentives and partnering.He was a member of the working group which produced the 1998 MoD/CBI Partnering Guide. His published works include: The Commercial Engineer, Successful Contract Administration, Commercial Risk Management and Successful Contract Negotiation.He was also a contributing author to UK Government Procurement and Contracts.

Acknowledgments I am indebted to the Ministry of Defence for its kind permission to reproduce substantial parts of its booklet – The Acquisition Handbook:A Guide to Smart Procurement. The views expressed in this Report are entirely those of the Author and the reproduction of MoD material does not imply that these views are approved or endorsed by the MoD.

Contents

1

INTRODUCTION

1

SMART PROCUREMENT GUIDE – BACKGROUND AND INTRODUCTION

5

Why was change needed? .............................................................................6 Why wasn’t the current system working well? ............................................7 What changes were recommended? ...........................................................10 What is Smart Procurement aiming to achieve? .........................................12 Who is involved in the new acquisition process? ......................................16 Who is in the Integrated Project Team? ......................................................23

2

SMART PROCUREMENT GUIDE – MAIN ELEMENTS

28

What are the main elements of Smart Procurement? .................................29 The Through-Life Management Plan ...........................................................33 Performance measures, targets and indicators ...........................................34 Smart Requirements ...................................................................................37 Acceptance and In-Service Date .................................................................42 Approvals ....................................................................................................44 Incremental Acquisition .............................................................................47 Smart Procurement and collaboration .......................................................50 Smart Procurement and Public/Private Partnership (PPP) .........................51 Teamworking, competition and incentives ................................................53 Financial changes resulting from Smart Procurement ................................58

CONTENTS

3

SMARTER CONTRACTS

61

Blame v co-operation ..................................................................................62 Gainshare and painshare ............................................................................64 Continuous improvement and continuous trading-off ...............................64 A step forwards or backwards? ...................................................................66 Simpler, clearer contracts ...........................................................................66 Turning partnering principles into practice ...............................................69

4

CONTRACT INCENTIVES

77

The search for incentives ...........................................................................78 Principles of Target Cost Incentive Fee contracts (TCIF) ..........................78 Why do it? ...................................................................................................79 Smart TCIF ..................................................................................................83 Firm Price Incentive Performance (FPIP) ...................................................87

5

SUMMARY AND CONCLUSION

89

Introduction In 1997 Hawksmere published two Special Briefings – Tendering for MoD Contracts and Negotiating with the MoD – in which I summarised the policy, processes and culture of dealing with the MoD as a customer. At that time, my six years experience working within the MoD and the subsequent seventeen years in the defence industry led me to one inexorable, but perplexing conclusion: Everything changes but everything remains the same. By this, I meant that the external environment that determined the MoD’s role and policy went through some dramatic shifts, but the experience of dealing with the civil servants seemed to remain remarkably constant. In these Briefings,I noted the change in the UK’s position and role in world affairs from the 1960s to the 1990s. I noted the changing function of the MoD (and its predecessors),over the centuries,from producer to procurer of arms and equipment.I examined the effect of the aggressive policies introduced by Sir Peter Levene as Chief of Defence Procurement in 1981. His value-for-money initiative with its hard emphasis on competition,with no special consideration for UK firms,certainly altered the face of defence procurement.This situation was exacerbated by the ending of the Cold War and the subsequent changing mission of the UK’s armed forces coupled with the inevitable, and not yet concluded, marketplace rationalisation of the defence industry in the UK and around the world.Governments came and went,policies arrived (the Private Finance Initiative and the Competing for Quality policies are examples), budgets were reduced, but the experience of dealing with the MoD remained much the same. The environment might change but the culture would remain surprisingly resilient. This culture, at least as seen by the industry side, is characterised by: •

an excess of bureaucracy

•

slow decision making

•

a belief that procedure (rather than innovation or judgement) can deliver value-for-money.

Challenges to these characteristics would traditionally be met with the explanation that such features are a requirement or perhaps a result of ‘public accountability’ and yet public accountability,at least as measured by the NAO in its regular views of MoD major projects,would constantly reek of disappointment at the unending problems (delay, excess cost, poor performance) and of frustration at the intractability of such problems.

1

INTRODUCTION

In summary, this robust culture (being a result of organisation, processes/procedures and inertia) failed to deliver value for money. Of course, industry has contributed to this failure. More inherent conservatism, inefficiencies developed from the cost-plus and the Cold War era and a tendency to lay all the blame at the MoD’s door all served to make matters worse. Indeed the MoD and industry became locked in a number of vicious circles,made worse by the changing external environment as well as more aggressive defence procurement policies:

MoD cut development expenditure

‘COTS’ Products lose money

Technology lag Business volume and margins decline Fewer new products

Less PV investment

Figure 1:The effect of the MoD approach to product/technology development In this example, we see the effect of the MoD approach to product/technology development.In order to save time and money,the MoD cuts development expenditure,relying on ‘Commercial off The Shelf’(COTS) products.However,the technical specification issued by the MoD cannot be met by genuine COTS products which then do not sell or must be bid with special development (usually the death knell of contract profitability) in a competitive firm price environment.Lost tenders or loss making ‘winning’tenders contribute to business decline (low profitability inhibits PV investment in next generation products),but the MoD does not notice immediately.The damage only becomes obvious when the next requirement arises and the technology lag becomes noticeable. Radar technology is a classic example of this problem. MoD investment in British radar development in the 50s, 60s and 70s gave the UK a commanding position, not only for the operational excellence

2

INTRODUCTION

of its products as seen by the UK service user, but also for the platform created for export sales and spin-off into the civil marketplace.The reduction in MoD development investment in this technology from the mid 1980s only produced visible effects a decade later. For UK companies, a most damaging reality has been the MoD’s willingness to competitively pitch UK companies (not enjoying HMG development investment) against overseas companies,who do benefit from such support from their own governments. Industry and MoD commentators will quickly recognise the foregoing as a standard ‘whinge’of the last 10-15 years.It is repeated here as an illustration of some underlying problems, for example: •

COTS Policy – a good idea, badly applied

•

MoD/industry cohesion – a lack of joint goals and understanding of where lies mutual advantage.

It is just this sort of problem which Smart Procurement will solve. In the conclusion of Tendering for MoD Contracts I remarked that a new defence initiative for Smart Procurement was on the launch pad.The initiative (known as the Smart Procurement Initiative or SPI) has been running for 18 months. In Negotiating with the MoD I ventured that any change in dealing with the MoD would be slow and steady, rather like the change of direction of a supertanker on the high seas. The main thrust of this Report will be on issues to do with strategy, organisation and processes.This leaves unanswered the question of the MoD culture.It would perhaps be true to say that the changes to the defence environment and policy have not changed the culture because they were not designed to. Any change has been largely incidental. As all companies who have been through any change programme know,to change the culture the people must be changed.To achieve this, three things are necessary: •

top management acceptance of the need for change

•

investment to effect change throughout the organisation

•

sustained effort and commitment to maintain the change programme momentum.

The single most encouraging and exciting feature of the SPI is that it embraces the need to change the culture. Riding on the back of New Labour is a commitment within the high political echelon of the MoD to make this change happen. Probably the greatest single challenge is to ensure that this commitment is maintained through the inevitable changes of personality at the political and senior management level (at the time of writing,many of the senior MoD posts,including

3

INTRODUCTION

the Secretary of State,have seen a change of incumbent since Smart Procurement was launched).The signs are encouraging,MoD has embraced IIP,is adopting the European Business Excellence Model and is considering personal incentives for staff involved in Smart project teams. There is however a cautionary note for industry. For many years, industry has complained about the MoD way of doing things,maintaining that the enlightened, modernised business outlook from companies is the more effective model. If (it is a big if) the MoD can sustain the SPI and change its culture, there is a chance that some companies will find themselves appearing slow footed.The challenge will have been called and those not ready will suffer.Actually doing things differently requires a joint MoD/industry effort. It is time for all to take the plunge. Inevitably,the focus of interest of the SPI and indeed its predecessor policy initiatives are the large scale, complex projects.The bulk of MoD defence equipment expenditure and the thrust of policy are aimed at getting tanks,fighters,submarines, missiles etc. delivered on time, on spec. and within budget. The hundreds of thousands of smaller projects and contracts will see some effect of SPI.This Report concentrates upon the issues relevant to major projects. The first problem for any commentator discussing the benefits and operation of the SPI is to decide how to describe what Smart Procurement is,in the first place. For me the best answer was to allow Smart Procurement to speak for itself. In Chapters 1 and 2 I have reproduced a substantial part of the text and diagrams from the MoD’s own booklet – The Acquisition Handbook: A Guide to Smart Procurement.I have divided this material into a number of sections and included a commentary that aims to get inside the thinking and to illuminate the many strengths and the few weaknesses of the SPI. Inevitably, given my background,I have found myself most focused on the commercial implications and issues that the SPI raises. In Chapters 3 and 4 I aim to add some value to the debate by discussing different forms of contracting that would underpin the SPI intent. Finally, it should be noted that my main aim is to provide a commentary on how SPI is at present unfolding and to add some thoughts on the commercial dimension. It is not the aim to accumulate all the published information on SPI.The MoD is to be applauded on the degree of openness and the efforts it has made in communicating its change programme to the outside world.

4

Smart Procurement Guide – background and introduction WHY WAS CHANGE NEEDED? WHY WASN’T THE CURRENT SYSTEM WORKING WELL? W H AT C H A N G E S W E R E R E C O M M E N D E D ? W H AT I S S M A RT P R O C U R E M E N T A I M I N G T O A C H I E V E ? W H O I S I N V O LV E D I N T H E N E W A C Q U I S I T I O N P R O C E S S ? W H O I S I N T H E I N T E G R AT E D P R O J E C T T E A M ?

chapter

1

Chapter 1: Smart Procurement Guide – background and introduction

Why was change needed? As part of the Government’s Strategic Defence Review, joint MoD, industry and consultant teams carried out the original Smart Procurement studies, including the PE/PAO and Systems Area and PE interface work,which were then linked to the Acquisition Organisation Review (AOR).The AOR was a fundamental examination of how MoD procured equipment and how it was organised to do so.The AOR team identified the following drivers for change: •

UK defence procurement projects continue to show time and cost overruns which significantly exceed the new performance targets agreed between the MoD and the Treasury as part of the MoD’s forward expenditure plan.

•

Defence equipment is becoming increasingly complex and diverse, demanding more flexible and shorter acquisition procedures.

•

The UK’s armed forces are facing less predictable threats and a wider range of tasks, so new technology needs to be deployed more quickly.

•

The defence industry is restructuring, with companies merging or allying both within the UK and across Europe,requiring a new MoD relationship with industry.

COMMENTARY

There is no doubt that industry supported the need for change. Delays and cost overruns in projects clearly prejudice the capability and efficiency of the armed forces. Impact on business has been just as prejudiced. Project delays fall into two categories.Those that occur prior to the award of a contract and those that occur afterwards. Pre contract delays cause increased bidding costs, difficulties in forming or maintaining engineering teams and difficulties in keeping proposals

6

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

and products up-to-date.Delays during contract execution inevitably cause increased costs and damage to the profit and loss account, impacting negatively on future investment and bidding plans. Cost increases pre contract produce problems of affordability and lead to project and capability uncertainty. Cost increases post contract – bearing in mind the Levene inspired absolute preference for firm price contracts – invariably mean bad commercial news. Any new defence policy that aims to improve control of cost, time and performance in a mutually beneficial way is very welcome. The long-term re-structuring of the defence industry, triggered by the ending of the Cold War,has had a significant impact on the old policies of competitive,armslength contracting strategy.These policies were premised upon the assumption that domestic competition would be sustained in an effective way (at least three competent,independent bidders for every requirement) and that overseas supply sources would be readily embraced to bolster that aim.The policy could not cope with the degree,depth and spread of industrial rationalisation and it is a welcome sign of the maturity of government thinking that blind adherence to such a policy – long overtaken by events – was definitely not Smart procurement.The rationalisation process itself is subject to regulatory control under the relevant competition laws and the scope for MoD influence on any particular rationalisation or re-structuring is severely limited,not only by questions of practicability but also by those same regulatory controls.

Why wasn’t the current system working well? The AOR concluded that the main problems with the current system were: •

There was no clear single customer within the MoD for equipment projects.

•

A number of processes – principally defining the requirement for equipment, researching potential technologies, managing procurement projects and supporting equipment throughout its life – were managed separately within the MoD,making an effective whole-life approach impossible.

•

Insufficient resources were allocated to the early procurement stages of projects, which meant that key decisions were being taken without sufficient information and understanding of the risks involved,often resulting in significantly greater expenditure and delays in later project stages to put matters right.

7

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

•

The procedures available to both the procurement and the logistics organisations were not flexible enough to cope with the different sorts of procurement and support tasks they had to carry out.

•

Those managing at all the various stages of the equipment life cycle were not delegated enough authority to do their jobs effectively.

•

The approvals process was cumbersome,causing substantial delays and inefficiencies at project level,while failing to deliver effective oversight.

•

The incentives available to outside contractors and to MoD staff were ineffective and contract conditions often discouraged innovative solutions that might change things for the better.

COMMENTARY

It was absolutely right and indeed somewhat brave of the AOR to point to these seven deficiencies, since together they undermine twenty-five years or more of accumulated policy and procedure that had started to develop with the formation of the old Procurement Executive in the early 1970s. From an industrial standpoint, companies had learned to live with and exploit the weaknesses of the PE/Service infrastructure. It is sufficient to list some of the many agencies involved, prior to the letting of a contract, to illustrate the obvious problems of communication, co-ordination and coherence: •

Service user

•

Operational requirements

•

Sponsor

•

Scientific advisor

•

Scrutineers

•

Budget holders

•

Research establishments

•

Test and trials establishments

•

Finance and secretariat

•

Policy advisors

•

Legal advisors

•

Project office

8

CHAPTER

1:

SMART

PROCUREMENT

•

Accountants

•

Technical cost specialists

•

Contracts branch.

GUIDE

–

BACKGROUND

AND

INTRODUCTION

This only represents officials within the MoD.The list is considerably longer if Treasury,DTI and other interested government departments are included.Of course, a subject as complex, diverse, strategic and economically significant as defence procurement demands an acquisition organisation of some size, complexity and skill mix. Indeed all of the above functions are retained in Smart Procurement but with a switch to coordinated,focused effort under an integrated project team structure. Disparate processes,insufficient early resources,lack of flexibility and inadequate delegation on the MoD side made it extremely difficult for companies to know how best to interact with the MoD as a customer.Marketing functions would interact with the end user, project management teams with each other, engineers with scientists, commercial people with contracts staff and so on. Each dialogue happening on a different plane, usually with divergent results! Company organisations would develop as mirror images of the MoD virtual organisation.Again, the problems of cumbersome structures are clear. The approval process has, for many industrialists and possibly some MoD staff, long been a subject of some deep obscurity with only the real aficionado understanding not only the processes but also the politics and techniques needed to secure actual approval. Finding the right form of contract that promotes co-operation and efficiency whilst preserving the sanctity of contract ‘tautness’ is no easy task. However, the AOR was again very right to point out that simple adherence to dogma had not brought success in the past and was unlikely to bring success in the future.

9

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

What changes were recommended? Ministers agreed with the recommendations of the AOR that changes should be made to the MoD’s procurement policies, to the processes for buying and supporting equipment, and to the way in which the MoD organised its acquisition function. The Strategic Defence Review White Paper and supporting essays set out the detailed rationale for change and the recommendations to be implemented.The high level recommendations are shown in Figure 2:

STRATEGY

PROCESSES

ORGANISATION

Different strategies for different procurements

Revised front and end process

Clearly defined customer within MoD

More flexible approach

Streamlined approvals and oversight

Greater openness

Integrated Project Teams (IPTs)

Restructured acquisition organisation

More effective positive and negative incentives

Figure 2: High level recommendations

There is strong support at the highest levels within the MoD, government and industry for realising the benefits of Smart Procurement.Ministers have taken an active lead in following through the recommendations made.Senior defence industry representatives are also involved in Smart Procurement implementation and are confident that industry will play its part.Major organisational change,principally the creation of the Defence Procurement Agency (DPA) and the formation of a new tri-service Defence Logistics Organisation (DLO) under the new Chief of Defence Logistics (CDL), has already taken place.

10

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

COMMENTARY

Without a shadow of a doubt industry supports the high level recommendations as stated in Figure 2.The key tests are the methods of implementation,the speed with which change can be accomplished and the energy and commitment to Smart Procurement which is implicitly and explicitly demanded of the staff involved. The formation of the DPA and the DLO are major steps in reshaping defence acquisition for the new decade.The DPA is run by an Executive Board:

CDP DPA Chief Executive

DCDP (Support) Deputy Chief Executive

Executive Director 1


DCDP (Operations)





Figure 3:The Executive Board of the DPA Plus non-executive directors and specialist advisors. Each Executive Director is responsible for one or more peer groups (sets of projects run by Integrated Project Teams (IPTs)), for one or more support groups (e.g. ordnance safety) as well as certain functional matters (e.g. Executive Director 5 is also Director General Commercial).This new board will pull together all the many facets that relate to the successful acquisition of systems and equipments but also considerably ‘flattens’the acquisition organisation within DPA.Whilst the executive directors have responsibility for their peer groups, in practice the IPT Leaders have much more ready access to CDP and his deputies than would have been the case under the old PE project organisation.The DLO has faced similar challenges, not the least of which is evolving from the old tri-service approach (Quartermaster General,Air Member for Logistics and Chief Fleet Support) into a genuinely single organisation.

11

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

What is Smart Procurement aiming to achieve? The aim of Smart Procurement is: ‘To enhance defence capability by acquiring and supporting equipment more effectively in terms of time, cost and performance.’ Understanding this aim means understanding that the effective procurement and support of defence equipment are not ends in themselves.They only have value if they produce an enhancement to defence capability.This aim gives particular emphasis to support, as an integral part of the overall acquisition process. The objectives of Smart Procurement are: •

To deliver projects within the performance, time and cost parameters approved at the time the major investment decision is taken (the ‘Main Gate’).

•

To replace the current MoD procurement process by one based on acquiring military capability progressively, at lower risk, and with optimisation of trade-offs between military effectiveness,time and whole-life cost.

•

To cut the time for key new technologies to be introduced into the front-line,where they are needed to secure military advantage and industrial competitiveness.

COMMENTARY

The first of the three objectives is, with one subtlety, shared between MoD and industry.Timely achievement of the project is essential to the goals of both these stakeholders.Timely achievement within the approved budget is essential to sound fiscal management by the MoD. Once the goal of timely achievement has been translated into a contract obligation it becomes essential to the chosen contractor that work is completed within budget (i.e. costs are below the contract price). Completion within the contract cost budget must be as important to the MoD as is timely achievement to the contractor.That is, the alignment of and commitment to each other’s objectives is essential if MoD and industry are to realise the aspirations of Smart Procurement.This subtlety – the recognition and balancing of the contractor’s needs to the MoD’s needs – is not obviously apparent in all of the SPI published material. It is not just a matter of words, but behaviour and, the Author contends, a matter to be dealt with in the contract.

12

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

The second objective – progressive capability acquisition – is stated to depend upon two principles – lower risk acquisition strategies and much greater use of trade-offs.The former is a welcome principle.Many firms have stumbled over the idiom ‘the good news is we won the competition, the bad news is we have to perform the contract’! Commercial disaster has too often been spelled by prestige competitions centred on over-ambitious programmes. Anything that bases projects on lower programme risk and lower cost risk is an important step forward. The early and pragmatic use of trade-off between military effectiveness and cost is also very sound thinking.Too often in the past, by the time the requirement (both on technical and volumatic dimensions) had been put into a form suitable for bidding, industry had been forced to cost an implied solution regardless of affordability.The resultant hiatus (when costs are realised of meeting the full requirement) can be very significant.An early matching of user needs to available monies and a willingness to drop low (military) value added requirements will produce many more successful projects. The objective of cutting the time to deploy new technologies is a goal to which all will commit.It has been a chilling thought that the terrorist or terrorist regime, unencumbered by process and procedure,can acquire new technology in a fraction of the time that can be achieved by legitimate authorities.It will also solve a dilemma faced by many companies who bring a new state-of-the-art product to the MoD after, say, two years private development, only to find that the product stagnates waiting, say, five years for acquisition approval.

Smart Procurement has a number of key features,some of which build upon the business processes and practices that already existed in the best preSmart Procurement projects: •

A whole-life approach,embodied in a single Integrated Project Team (IPT) bringing together the main stakeholders.The IPT runs for the life of the project, moving from the DPA to the DLO at an appropriate time. Industry will be part of the IPT except during the assessment of competitive bids.

•

Clearly identified customers for the IPT. A Central Customer within MoD headquarters, organised around capabilities, providing funding and clear and consistent direction to the IPT for all procurement phases of the project life cycle. This Central Customer is responsible for developing and managing a balanced and affordable equipment programme. The Second Customer, normally the appropriate Front-Line Commander-in-Chief,acts as customer for equipment in service.

13

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

•

A greater willingness to identify,evaluate and implement effective trade-offs between system performance,whole-life costs and time.

•

A better,more open relationship with industry,based on partnering and the identification of common goals including gain-share opportunities, underpinned by competitive contractor selection whenever this provides best value for money.

•

New procurement approaches,including incremental acquisition.

•

Sharper procurement time scales, with a simpler, streamlined process for project approvals.

•

More investment during early project phases,so that risk is reduced before binding performance, cost and time parameters are set.

COMMENTARY

The seven key features listed are a laudable set of initiatives each of which raise interesting points of principle and debate,particularly for the industrialist.These points will be introduced later in the Report as each of the key features receives its detailed treatment

People who make an effective contribution to Smart Procurement are likely to share the following values and beliefs: •

An empathy with the customer, supporting a commitment to providing equipment which meets the user’s needs,on time and to cost.

•

The drive to deliver a high level of performance, as a result of programme setting and monitoring progress against agreed target milestones.

•

A desire to work co-operatively with fellow team members and others, valuing the diversity of the team and understanding the different roles of colleagues.

•

A predisposition to share ideas and data, and the resolve to overcome problems.

•

A wish to challenge convention and improve processes rather than hide behind ‘the rules’and be satisfied with current performance ‘norms’.

14

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

COMMENTARY

The five values and beliefs present an interesting challenge for both MoD and industry staff.The first two will already be very familiar to any company who has been through the ‘standard’ business process re-engineering cycle. A common output is a mission or value statement which embrace a commitment to customer care and a commitment to achieve results. Whilst walking-the-talk is not always as easy as we would like, at least there is nothing unfamiliar in the sentiment. Adopting such drivers may be more of a challenge to ex-PE staff,where arguably the key driver has been compliance with procedure rather than a conviction that customer (central or second as appropriate) needs come first. Team working will also be a challenge which the re-invented MoD structure must meet.Few would argue that there have been debilitating tensions between different organs of the MoD machinery.Different masters,different agendas,non-coalescing responsibilities,have contributed to the problems of pre-Smart procurement.The integration of teams has been incomplete.Many years ago MoD project teams became integrated to embrace project office,finance and contracts staff.But this really only integrated that part of the (much larger) total effort that interacts directly with industry.More comprehensive integration based on teamwork will be a great benefit. But what of team working between MoD and the contractor? Here again there is a philosophical change of direction to be embraced. (PE) MoD’s role has been to monitor contractor performance without interference – ‘eyes-on-hands-off’ – in order once again to preserve the integrity of the contractual relationship.The degree of monitoring without interference has varied widely across the equipment programme.In some projects,the MoD has preferred to micro-manage the contractor. In others the MoD has been willing to stand back. In some projects both sides have already adopted a ‘to hell with the contract, let’s get this job done together’ attitude (don’t forget the MoD/CBI Partnering Initiative which pre-dated the SPI by two years) whilst others have preferred to stick to the contract, for good or not. A general shift to joint team working will come from development of mutual trust and confidence, combined with forms of contract designed to underpin cooperation.This will take time. In a similar vein,sharing ideas and data may prove problematic for many key players. Industry has been reluctant to share its ideas and data with the MoD for legitimate concerns regarding the protection of intellectual property rights.The MoD has not always been willing to share its ideas with the contractor for fear of imputing to itself responsibility for decisions which, on the face of it, lie exclusively within the contractor’s domain.Individual companies working together on the same project have been reluctant to share their proprietary information for fear of compromising competitive advantage.These are not easy nuts to crack. Only time will tell if the net gains to all,of successful projects,will outweigh natural and legitimate conservatism over exchange of ideas and data.

15

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

In some ways the fifth value and belief is the most fascinating of all.The civil service has been designed over centuries to be conservative, imperturbable and inflexible.The MoD is the archetype.Changing the in-bred way of thinking to be innovative and challenging is the most delightful of prospects.It does need to happen.However, the hidden challenge is for industry not only to be willing to take the lead but also to accept that not an insignificant number of companies must face up to the same challenge as the MoD.There are companies where not only has it become a convenient habit to criticise the MoD’s lack of innovation and innate inertia, but they have adapted to conjoin with MoD working practices.In such examples both sides face the same issue. It is simply not good enough to expect the other to be more flexible without giving flexibility in return.The exciting opportunity that the Smart Procurement environment offers is the freedom and promise of working together to make things better for all concerned.

Who is involved in the new acquisition process? Within the MoD,the central relationship in the acquisition process is between the customer and the supplier.

Customers Over the life of a project there will be two customers. The Central Customer is responsible for developing and managing a balanced and affordable equipment programme to meet the current and future needs of the armed forces.Within this overarching mission,the Central Customer’s tasks are: •

Requirements definition – the identification and prioritisation of capability gaps, and their definition in the form of a User Requirements Document (URD).

•

Equipment planning – the balance of investment between and within capabilities.

•

Seeking approvals – in conjunction with IPT Leaders.

•

Authorising acceptance – the confirmation that the need for military capability has been met by the systems supplied.

16

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

Within the Central Customer organisation,a number of Capability Managers will exist. Each Capability Manager will be responsible for a defined area of capability,and will be supported by one or more Capability Working Groups (CWGs).CWGs will include representation from all significant stakeholders in the capability area, including users, the scientific community, concepts, doctrine and force development staffs,the DLO,personnel staffs,Integrated Project Team (IPT) leaders and industry representatives. CWGs are the primary means by which the views of stakeholders are accounted for, and through which the work of the Capability Manager is endorsed.A Capability Manager will act as the customer for an IPT which is concerned primarily with the acquisition of new capability. The Capability Manager will task the IPT through the medium of the Customer Supplier Agreement (CSA). The Second Customer is a representative of the user Top Level Budget (TLB) holder,normally the appropriate Front-Line Commander-in Chief.In the early stages of the project, the user,as the future Second Customer,will be a key member of the CWG.As the project progresses,in-service factors will start to predominate, and the Second Customer will state, through the Central Customer’s CWG,their needs for equipment support in the context of overall MoD plans.As the new equipment enters service the Second Customer will take on the main customer role and confirm with the IPT the level of equipment support, including availability and sustainability, to be provided.The Second Customer will need to maintain close contact with the Central Customer, who will remain as customer for the remainder of the manufacture phase, any incremental acquisition steps, and upgrades reflecting a change to the user’s requirement.

COMMENTARY

The introduction of Customers 1 and 2 together with the change of status from PE to DPA is potentially of huge significance.The appointment of Customer 1 (in particular) and Customer 2 will bring much needed focus,although no one should underestimate the scale of the task of organising and supporting a capability management structure and a tri-service logistics management structure.The key policy change,if the Author’s interpretation is correct,is to massively re-assert the voice of the end user in the acquisition process.Prior to the Levene era,his voice carried great weight usually founded on arguments of operational urgency. One strand of the Levene era was to the effect that In-service dates did not matter (in the unarguable absence of actual,major war fighting conflict) and that procurement policy did.The PE would tell the forces what they could have and when they

17

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

could have it. On the face of it, Customer 1 and Customer 2 now call the shots (an apposite phrase!) with the DPA merely providing the professional skills necessary for acquiring goods and services from private industry. This is a gross simplification but the essence of the observation is sound. Even within a team environment it is the Customer’s need which is paramount. Changes in the ‘MoD Centre’are quite profound.As the Central Customer,Customer 1 has several aims: •

Switching emphasis to delivery and sustaining operational capability, away from the traditional equipment replacement role.

•

Combining responsibility for equipment provision with the accountability of programming and financial aspects.

•

Establishing an organisation that can and will make effective trade-offs between cost, time and performance.

•

Developing a clear relationship with the DPA under a customer/ supplier agreement.

In achieving these aims,the new Central Customer also has to meet the challenge of running simpler and more flexible processes than has hitherto been the case. The old MoD systems area was organised around single service operational requirements staffs: Deputy Chief of Defence Staff (Systems) DCDS(s)

Director General Research and Technology

ACDS OR (Land)

ACDS OR (Air)

ACDS OR (Land)

DGICS

Directorate of Defence Systems

Operational Requirements

ACDS OR = Assistant Chief Defence Staff Operational Requirements

Figure 4:The old MoD systems area

18

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

Although there had been a change some years ago to organise procurement on the basis of platforms and systems (rather than Air,Land and Sea) the importance of the single service operational requirements staffs remained of great significance. The new organisation at the centre shows how great a change has now been made:

Deputy Chief of Defence Staff (Equipment Capability): DCDS(EC)

DG Research and Technology

CM Strategic Deployment

CM Strike

CM Manoeuvre

CM Information Superiority

DG Equipment

Capability Managers

Figure 5:The new organisation

Supplier – The Integrated Project Team Although there are separate customers for the procurement and support phases of an equipment acquisition project, the equipment will only have one supplier within the MoD, the Integrated Project Team (IPT).The IPT will be responsible for translating the Central Customer’s expression of the outputs or results that users require from the system (the User Requirements Document,or URD) into an output-based statement of what the system must do to meet these requirements (the System Requirements Document, or SRD), devise and cost equipment solutions to meet the SRD, produce the material required to support the customer’s Main Gate approval, and manage the development, manufacture, in-service support and eventual disposal of the equipment. The IPT remains responsible for the project throughout its life.The IPT will be part of either the DPA, under CDP as Agency Chief Executive, or the DLO, under CDL.

19

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

The Smart Procurement IPT has three key characteristics: It is responsible for managing the project from concept to disposal. Prior to Initial Gate,an embryonic IPT will be formed under an IPT Leader, or an existing IPT,tasked to advise the CWG on equipment options that should be investigated and their likely time and cost boundaries, and to assist in the preparation of the Business Case for Initial Gate. An IPT would be formally constituted and the overall direction of its work established in a CSA agreed with the Capability Manager. For smaller projects, the pre-Initial Gate work will normally be conducted by an appropriate Cluster IPT, which will assume formal responsibility for the project after Initial Gate.Later,the change in the balance of activity within the IPT from risk reduction and procurement to equipment deliveries and in-service support will determine the timing of the transfer of the IPT from the DPA to the DLO. This whole-life perspective, together with the clearly defined customer-supplier relationship described below,will allow an IPT to plan, procure and support equipment in a consistent manner. It includes all the skills necessary to manage the project.These range from requirements management through project management and engineering and technical skills to equipment support. The IPT will include representatives from industry,except during the assessment of competitive bids,and,at the appropriate points,independent scrutineers. The balance of skills will change over time to reflect the demands of the projects. Most skills will be held within the core team, reporting to the IPT Leader,but the IPT Leader may need to ‘hire in’specialist resources from time to time,such as a senior contracts officer for complex negotiations or specialist pricing experts.This integrated team approach will ensure close and effective involvement of all major stakeholders in the build-up to key decisions,avoiding costly last-minute conflicts.Such teams should both promote a successful final outcome and offer major improvements in time and whole life cost reductions. It is headed by an effective and empowered IPT Leader.The IPT Leader is the line manager for all MoD core members of the IPT,although functional links (‘dotted lines’) to senior specialist staff outside the IPT will remain.The success of an IPT will depend in large part on the calibre of the team leader and his/her authority, both within the team and in relations with industry and the customer.

20

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

COMMENTARY

Clearly the role of the IPT is widely drawn.The responsibilities are wide and deep. Dedication of the IPT is to the whole life cycle of the project. In fact the scope of the IPT is not so vastly different from the old MoD project offices.The key differences are firstly that the team draws in many more stakeholders than the old project offices and secondly that the team will stay with the project as it moves from DPA to DLO (previously the move of responsibilities from PE to the PAOs – QMG,AML, CFS – was less all embracing). The three key characteristics of the IPT – life cycle dedication, full skill set and strong leadership – are all key components for success.The challenges here are plain to see.The MoD needs to deploy significant numbers of high skilled, highly trained people who are geared to managing achievement and not managing procedures. This will take investment of time and money. The MoD has made this commitment and companies need to ensure that they are able, as well as willing, to respond with staff of equal calibre.

Customer supplier relationships It is vital that the customer supplier relationship within the MoD is right. It will be governed by a Customer Supplier Agreement (CSA) which will outline the working practices to be adopted between the IPT and the Customer and record expected levels for the equipment’s performance,in-service data,and cost parameters,and ranges for these parameters within which the IPT Leader has the freedom to work. Typically, the CSA will also specify work plans including time and cost targets for completing the next project phase, set out the equipment options to be investigated by the IPT,and the outputs to be provided for the support of the equipment when in-service. The IPT will deal with the Central Customer mainly through the appropriate Capability Manager, who will need to assess and focus the various strands of interest within the Central Customer,the user (as future Second Customer),and other stakeholders into a single,coherent,line of direction for the IPT Leader throughout the procurement phases of the project.When the Central Customer is the major customer, the IPT will report progress against approved equipment performance, cost and time parameters and targets to the Capability Manager. Once an equipment is in service the emphasis will shift to the support function and the Second Customer.IPTs managing a range of projects at different stages of the acquisition cycle will be answerable to the appropriate customer for each project for the type of effort and expenditure concerned.

21

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

Where a project is at a stage where the IPT is simultaneously expending funds from both the DPA and DPO TLBs on procurement and in-service support, or where there are different projects in procurement and support stages,the IPT Leader will have financial accountability to both CDP and CDL.The IPT Leader will input costs for both support and procurement plans and account to the appropriate TLB holder (CDP or CDL) for the expenditure.

The IPT Leader will be: Answerable to the customer, through a Customer Supplier Agreement, for the procurement and support of equipment capability,meeting agreed cost and performance targets and milestones within the agreed budgeted resources and the parameters set by the approving authority. Accountable to CDP and/or CDL for the property and professionalism of the IPT, and the efficient and effective use of resources in delivering the customer’s specific requirements.

COMMENTARY

The subject matter on customer supplier relationships raise two interesting points. An MoD internal contract, the CSA, between the IPT and the customer is a good idea. The obvious next step is for the MoD to desire the alignment of the IPT/Customer CSA with the DPA/Contractor and/or DLO/Contractor acquisition contracts.This has two potential problems. Negotiation of the CSA may have to precede negotiation of an acquisition contract. Furthermore the negotiation of the acquisition contract may be unnecessarily constrained by the terms of the prior CSA.The answer is clearly that the IPT needs to take on board its industry partner at the earliest time so as to facilitate the alignment of the CSA and acquisition contracts, albeit there may be problems of differing forms of expression that are appropriate for an internal contract and a business contract. The second question is one of mechanics and personnel management.In principle the IPT physically moves (its seems) from the DPA at Abbey Wood to the relevant DLO location at the appropriate time.And yet it is acknowledged that contracts supporting DPA and DLO phases may overlap with both organisations expending project funds with the same contractor(s) at the same time.No doubt each project will find its own solution and the practical problems will be overcome in time.

22

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

Who is in the Integrated Project Team? The Team Leader The IPT Leader may have an extensive background in any one or more of the core IPT membership areas and, if chosen from within the MoD, will be a suitably experienced member of the newly created Acquisition Stream. To succeed,he or she will need to have strong leadership and management skills. Continuity and stability of leadership of the IPT across approval gates and key phase changes,and particularly during the transfer of the IPT to the DLO’s line management, will be critical to success. Effective succession planning will be required to achieve this but the IPT Leader,whether civilian or military, should typically expect to remain in post for four to five years to provide continuity. IPT Leaders and members can be promoted while in post. The IPT Leader will lead the team throughout the project’s life cycle,managing the project in ways which secure the most cost-effective balance between time, whole-life cost and performance, and achieving results beyond what is currently accepted as the ‘norm’.He or she will involve all team members and external stakeholders in the project, balancing their needs and getting support for the most effective course of action.The IPT Leader will manage the team from day-to-day, but also provide a strategic direction and vision that the team members can identify with and see their own part in.The Leader will be a motivator and role model for the team, demonstrating the values and beliefs which promote the principles of Smart Procurement.He or she will set clear and common goals for all team members, team and individual performance targets, review performance regularly, coach and develop the team to reach their full potential,address under performance and acknowledge and take steps to reward excellence.

Core IPT members MoD core members of the IPT are under the line management of the IPT Leader.The core roles within an IPT – shown in the diagrams overleaf – are likely to be: •

Requirements management

•

Project programme management and risk management

•

Project engineering, technical, quality and reliability expertise

23

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

•

Integrated Logistic Support (ILS) management, including the traditional equipment support functions

•

Commercial management

•

Finance management

•

Secretariat

•

Industrial expertise.

Each of these roles will have a part to play in each project phase, but the relative importance of the contribution of each of these core team roles will vary during the different phases of acquisition.The diagrams overleaf are intended to show typical outline team structures for an IPT in the Assessment Phase and an IPT in the In-Service Phase.These are not intended to be prescriptive, but to illustrate the changing composition of the team.

IPT Leader

Assessment Phase

IPT Leader Requirements Manager

Programme Manager

Integrated Logistics Support Manager

Project Engineer Finance Officer Commercial Officer Secretariat

Requirements Manager

Integrated Logistic Support Manager

Integrated Logistics Support Manager

Finance Officer Commercial Officer Industry Secretariat

In-Service Phase

Industry

Figure 6:Typical outline team structures for an IPT

24

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

Associate IPT members An IPT Leader will sometimes need to draw on expertise beyond that covered in the core team.Those providing this expertise may act,usually part-time, as associate IPT members. A decision to include someone as an associate IPT member would have regard to the importance and duration of their contribution to the IPT.They would be under the IPT Leader’s direction when working on the project, but not under his or her line management. Examples of associate IPT members might be representatives of: •

Customer scientific staff, particularly supporting operational analysis

•

Customer research managers

•

Specialist Procurement Services

•

Staff from the DPA Private Finance Unit (for DPA projects) or the Public Private Partnership Unit (for other projects and policy)

•

Service Users,Trainers, or Acceptance and Trials units

•

Training Support Manager

•

Specialist service support areas (e.g. publications, transport)

•

Safety specialists, such as the Ordinance Board or the Chief Inspector of Naval Ordinance

•

Defence Export Services Organisation

•

Department of Trade and Industry.

Attached IPT members At certain times,and most particularly in the periods leading up to the submission of the Initial Gate and Main Gate Business Cases,Technical Scrutineers (from the Chief Scientific Adviser’s staff) and scrutineers from the Capability Resources and Scrutiny branches in MoD Headquarters would be attached to the IPT (or embryonic IPT and CWG for Initial Gate).Their role would be two-fold.First,to support the IPT by advising on the assessment and management of technical risk and operational analysis, and the preparation of documentation and analysis for the Approving Authorities.Second,providing an additional level of oversight.To fulfil these roles effectively, they need to remain formally independent of the IPT, but will work closely with it.

25

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION

COMMENTARY

Two things are striking about the IPT subject matter.The first obvious,the second less so.The first is that the total list of potential IPT members,drawn as core,associate and attached representatives,is formidable.This is an awesome management task given the breadth of interest of, for example, the requirements manager representing the interests of the capability manager. In particular these groups must be integrated so as to produce a much more effective and productive result than the previous myriad and disparate ‘turf’ owners. A more significant question is the role of industry in the IPT,given the IPT mission. There is an analogy between MoD’s moves to IPTs structures with similar moves within prime contractors’ structures.This is best illustrated as follows:

PE

Contract

Prime Contractor

Contract

Prime Contractor

Subcontracts

Turf owners

Pre SPI

Post SPI – Model 1

PE MoD IPT

Industry IPT


PE

Contract

Prime Contractor

The IPT

26

CHAPTER

1:

SMART

PROCUREMENT

GUIDE

–

BACKGROUND

AND

INTRODUCTION


Contract

Figure 7: SPI Models

Assuming that Pre-SPI neither MoD or Prime Contractors operated IPTs (actually the more enlightened prime contractors did) and that Post-SPI both will do so, then three basic alternatives arise: Model 1 The MoD IPT is primarily aimed at co-ordinating MoD only stakeholders. It interacts only marginally with the industry IPT,largely for monitoring and liaison purposes only. Model 2 A single IPT embraces all MoD and Industrial Stakeholders. Model 3 MoD and industry IPTs exist separately but intersect and interact significantly. It seems clear that there is as yet no single preferred model.The characteristics of individual projects will dictate which model is most suited.Where trust is low, the tentative nature of Model 1 may be in order.Very large projects may preclude Model 2 simply because of organisational and administrative complexities.Model 3 may be appropriate for an existing project where trust is high and transition to a full IPT would be fairly painless.What does seem important is that the IPTL and the lead figure on the industry side should agree at an early stage which model is to form the basis of the relationship.

27

Smart Procurement Guide – main elements W H AT A R E T H E M A I N E L E M E N T S O F S M A RT P R O C U R E M E N T ? THE THROUGH-LIFE MANAGEMENT PLAN P E R F O R M A N C E M E A S U R E S , TA R G E T S A N D I N D I C AT O R S SMART REQUIREMENTS A C C E P TA N C E A N D I N - S E R V I C E D AT E APPROVALS I N C R E M E N TA L A C Q U I S I T I O N S M A RT P R O C U R E M E N T A N D C O L L A B O R AT I O N S M A RT P R O C U R E M E N T A N D P U B L I C / P R I VAT E PA RT N E R S H I P ( P P P ) TEAMWORKING, COMPETITION AND INCENTIVES F I N A N C I A L C H A N G E S R E S U LT I N G F R O M S M A R T P R O C U R E M E N T

chapter

2

Chapter 2: Smart Procurement Guide – main elements

Initial Gate

Main Gate

Disposal

In-service

IPT within the DPA

Manufacture

Demonstration

Assessment

Concept

IPT Leader appointed Embryonic IPT formed

IPT Leader transfers IPT to DLO IPT within the DLO

Figure 8: The New Acquisition Cycle

What are the main elements of Smart Procurement? The objective of the new cycle is to assist the reduction of risk during the Concept and Assessment phases so that, at Main Gate, there is a high level of confidence that project targets for time,whole-life cost and performance will be achieved.Encouraging a greater proportion of project expenditure in these early phases is therefore an objective of Smart Procurement. At the highest level, each of the six acquisition stages involves executing the plan agreed in the previous stage,reviewing the outcome,and planning for the next stage.The basic content of each stage is as follows:

29

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Concept Produce and baseline a statement of the output or results that users require from the system,framed as a URD.Form embryonic IPT.Initial involvement of industry. Identify technology and procurement options for meeting the need that merit further investigation.Obtain funding and agree plan for the Assessment Phase,identifying performance,cost and time boundaries within which it is to be conducted. Produce first Through Life Management Plan. Pass Initial Gate, where time, cost and performance boundaries of validity will be approved for the project as a whole.

Assessment Produce and baseline SRD, defining what the system must do to meet user needs as stated in the URD.Establish and maintain the linkage between user and system requirements. Establish full IPT. Identify the most cost-effective technical and procurement solution, bearing in mind Ministers’ endorsed policy on PFI. Develop SRD, trading time, cost and performance to identify the optimum solution within the Initial Gate boundaries. Reduce risk to a level consistent with delivering an acceptable level of system performance to tightly controlled time and cost parameters.Agree funding and plan for subsequent phases.Pass Main Gate with tightly defined and approved time, cost and performance boundaries.

Demonstration Progressively eliminate development risk in order to fix performance targets for manufacture,ensuring that linkage is maintained between the final selected solution and the SRD and URD. Place contract(s) to meet the SRD. Demonstrate ability to produce integrated capability.In many cases,demonstration is the stage where a single contractor is selected. However, this should be done at a stage appropriate to the project, which could either be earlier or later in the project life cycle.

Manufacture Deliver the solution to the military requirement within the time and cost limits appropriate at this stage.Complete system development and production, and conduct System Acceptance to confirm that the System satisfies the SRD as agreed at Main Gate.Transfer line management of IPT to DLO and customer function to Second Customer.

30

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

In-service Confirm that the military capability provided by the system is available for operational use, to the extent defined at Main Gate, and declare the InService Date.(This may happen in Manufacture instead.) Provide effective support to the front line. Maintain levels of performance within agreed parameters.Carry out any agreed upgrades or improvements,refits or acquisition increments.

Disposal Carry out plans for efficient, effective and safe disposal of the equipment.

COMMENTARY

The New Acquisition Cycle is quite different from the old Downey Project Life Cycle: Feasibility Study

Project Definition

Development

Manufacture

Support

Amongst other things, the Downey cycle was predicated on an assumption that the project would need a development phase to carry forward the project specific research work carried out as part of the feasibility and project definition stages. This assumption was necessary because of the practice from the early sixties of designing defence systems and equipment largely from scratch.The advantage was that the user had reasonable surety that projects would aim to achieve his precise requirements.The disadvantages were the high cost of bespoke development and the delays that resulted from the underestimation of technical difficulties and development timescales. Over ten years ago, the MoD adopted a policy of seeking to make the maximum possible use of Off-The-Shelf (OTS) technology in an attempt to avoid these problems. In 1988 the Jordan, Lee and Cawsey report built on this policy by proposing an alternative project life cycle that diminished development but introduced a key stage of ‘product demonstration’. The laudable aim was to ensure that major project financial commitments were not made until working hardware had been seen and tested.In principle this was a marked improvement on the Downey cycle where too frequently major commitments were made on the strength of paper only – reports from feasibility,project

31

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

definition and early development stages which were unduly optimistic about eventual costs, timescales and performance.The difficulty with the Jordan, Lee and Cawsey proposal was that it was over-optimistic about the viability of OTS technology,leading to levels of bespoke design and development not significantly less than before. In conjunction with the white heat of the competition policy, the burden of private venture development (e.g. to produce bespoke product demonstrations prior to selection) on companies increased dramatically at a time when defence expenditure was beginning to fall in real terms and when competition from foreign sources was increasing. The new Acquisition Cycle retains the Jordan, Lee and Cawsey preference for ‘demonstration’ over an overt reference to ‘development’, as though to maintain the fiction that minimum development is attainable on major projects.Nevertheless the text acknowledges that demonstration at least deals with the progressive elimination of development risk.However,as described,the relationship between Main Gate approval and the demonstration/manufacture stage seems to have a weakness that may be ameliorated by two principles which are not,to the Author’s mind, made sufficiently explicit.The weakness can be seen in the high expectations about the quality of cost, time and performance figures at the end of Assessment,in preparation for Main Gate approval.The problem is that high quality figures must be available before development has taken place and,in many cases, before a contractor has been selected.The limitations on the quality of the information seem obvious.The first amelioration is the stated intent to encourage a greater proportion of project expenditure in the concept and assessment phases.This at least holds out the prospect of informed data being submitted at Main Gate.The second amelioration is the implication that cost,time and performance trade-offs must be permitted to continue post Main Gate, provided that the project is eventually delivered within the overall PCT envelope (i.e.the Key User Requirements are met on time within budget, even though the implementation may be quite different from that anticipated at Main Gate).The interesting point then arises as to whether a mechanism for PCT trade-offs can be built into the acquisition contract(s) following Main Gate approval.This question is discussed in Chapter 5.

32

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

The Through-Life Management Plan The Through-Life Management Plan (TLMP) should lie at the heart of the IPT’s work. An outline TLMP should be produced in the Concept Stage by the embryonic IPT as soon as possible after its formation. The TLMP links together the other key documents for the IPT: •

The Approval,setting the performance,time and cost parameters within which the project remains viable, and supported in the Business Case by appropriate cost-effectiveness analysis.

•

The CSA, recording the working relationships between the customer and supplier,the performance,time and cost parameters within which the IPT is expected to deliver the project, the deliverables and outputs required for the project and its performance measures and targets.

•

The URD and SRD recording the requirements of the system being acquired.

A TLMP would include: •

a record of basic project information (approval parameters, performance measures, targets and indicators, stakeholders, objectives and common goals)

•

a work breakdown structure and internal project organisation

•

a project schedule – all stakeholder activities, involvement and commitment

•

a risk management plan – time, cost and performance

•

a resource plan and Programme Responsibility Matrix recording all the financial resources available to the project and who owns them

•

systems engineering,system and sub-system design and trade-offs

•

plans covering,amongst other things,requirements management, safety, reliability and maintainability, ILS, quality, standardisation, Training Needs Analysis (TNA),systems realisation,Integrated Test, Evaluation and Acceptance (ITEA), transfer agreement to a DLO Cluster IPT (for small projects), and disposal

•

procurement and through-life support strategy,including incremental acquisition and planed upgrades

•

Master Data Assumptions List (MDAL) and whole-life cost model.

33

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

The TLMP should be developed and maintained as the project progresses, improving in accuracy at each stage, thereby increasing confidence in the IPT’s cost, time and performance predictions.

COMMENTARY

The introduction of the Through Life Management Plan is a good step.The TLMP, if properly maintained,should provide a very useful single document for the project, that provides an authoritative source of project specific strategy,policies and plans. It would be nice to see it include a behaviour charter so that some of the people issues are included as well as task matters.

Performance measures, targets and indicators Each IPT will have a number of performance measures related to the team’s output, particularly the performance, cost and time aspects of the team’s project(s).New performance measures can be added as a project progresses. Targets will be set for each performance measure, a target being a quantified objective to be attained at a specified future date. An IPT’s success will be judged by how well its performance compares with its targets.Correctly set performance measures and targets focus people on the essentials of their job – achieving or bettering the targets means overall success. Targets for the IPT’s fall into two categories.The first are steady state targets agreed with the customer and recorded in the CSA.These targets will support the DPA’s key targets or the overall DLO targets as appropriate. Simple steady state performance measures and targets for a hypothetical project might be: •

Performance – achievement of all Key User Requirements

•

Achievement of ISD – March 2000 (the 90% confidence date)

•

Whole-life cost – within £70M (90% confidence)

•

Procurement cost – within £20M (90% confidence)

•

Estimated annual support cost – within £5M for given usage profile (90% confidence).

34

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

The second category of targets forms an essential part of the IPT breakthrough process.These targets are defined as hard and stretch objectives. They support the challenging performance,time and cost targets MoD agreed as part of SDR.Example stretch objectives for improvements to the project might be: •

to reduce slip on a project by six months (hard) and twelve months (stretch)

•

to regain original performance (stretch)

•

to reduce cost by 10% (hard) and 20% (stretch).

The diagrams that follow show how this breakthrough process works and how hard and stretch objectives are characterised.Successfully established hard and stretch objectives will be incorporated into the CSA. An IPT, its peer group (if it is in the DPA) and the customer will also use indicators that give supporting information about input,output or performance. Indicators provide warning of potential problems, so that they can be diagnosed and solved.They will not be made routinely available to senior management.Indicators might cover staff skill and morale,and relationships with the customer and industry, as well as information on risk reduction, performance, cost and time. Progress against the targets set, and the state of the chosen indicators will be reviewed regularly between the customer and IPT.

35

CHAPTER

2:

SMART

PROCUREMENT

INPUTS

GUIDE

PROCESS

–

MAIN

ELEMENTS

OUTPUTS

Baseline – IPT leader and customer agree baseline for whole life cost, perfomance and time Necessary inputs Project diagnostics Set objectives – both hard and stretch

Customer push for performance, cost and time improvements AOR/McKinsey report Known improvement areas External sources

Hard and stretch objectives

Generate ideas for improvement Brainstorm/syndicate ideas for improvement with stakeholders

Other IPTLs

Compare ideas for improvement with benchmark

Consultants, SPI, DIPT

Analysis

Continuous improvement

Planning – prepare plans to realise objectives

Produce action plan

IPT leader and customer review progress against action plan and objectives

Progress report

Targets in CSA achievable, quantified objectives are agreed with customer and included in CSA

New targets in CSA Savings taken from funding line

Hard objectives

Stretch objectives

•

Testing but achievable

•

Encourage team to think ‘out-of-the-box’

•

Work as a true team to overcome barriers and share ideas

•

Target is out of reach, but not out of sight

•

•

Team required to adopt novel approaches to identify savings

•

If the team can easily achieve these they are set too low.

Stretch objective gives a requirement and mandate to address all boundaries and constraints, even ‘impossible’ ones to uncover all possible savings

•

Team must determine ‘what needs to come true’ for the stretch objective to be met and then make it happen.

Figure 9:The Breakthrough Process

36

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

COMMENTARY

The introduction of hard and stretch targets is both fascinating and tantalising. Experience has shown that the ‘steady state performance measures and targets’ have been difficult enough to achieve. It is a measure of the ambitiousness of the SPI that Smart Procurement intends not only to fix all the traditional problems of steady state achievement but also to make tangible both hard and stretch targets. Rather oddly the process description and the Breakthrough Process diagram both fail to mention any dialogue with industry.If industry’s opinion is all that is needed, that dialogue might be supposed. If industry’s commitment (which can only be made real through a contract) were needed then some overt reference would be helpful.The question of the contractability of hard and stretch targets touches upon the key issue of incentives, a topic that will be covered later.

Smart Requirements Smart Requirements is a fundamental process change being introduced within Smart Procurement. Smart Requirements is a new method of capturing, engineering and managing requirements based on the principles of Systems Engineering.The key objective is to introduce a whole system, whole-life, evolutionary requirements process which will involve all stakeholders and deliver effective and sustainable defence systems to the front-line. Smart Requirements replaces the old process of producing Staff Targets,Staff Requirements and their equivalents for smaller projects,and focuses on user needs rather than equipment characteristics. Smart Requirements is based around two key documents or databases:

User Requirements Document (URD) (prepared and owned by the Capability Manager) The URD is an all-embracing, structured expression of the user needs for a bounded operational capability.It is generated from the Single Statement of Need identified through the equipment capability strategy process. The URD consists of a complete set of individual user requirements supported by other documents.URDs are the means by which the Capability Manager develops, communicates and maintains the user’s requirement throughout the life of the system.

37

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

Needs

Constraints

Specify and structure user requirement

Establish scope/context

Threat Environment

ELEMENTS

Effectiveness

Identify users

Other nations Collaboration

MAIN

Capabilities/activities

Identified Capability

–

Capture user requirement

Review user requirement

Related systems

Develop concept of use Doctrine

Identify constraints

Provide feedback on system viability

URD

Constraints

Figure 10: User Requirements Document

URDs identify and clarify the need in order to: •

Communicate the user need to other parties,primarily the IPT and industry. The URD will underpin the CSA between the Capability Manager and the IPT Leader and, together with the SRD, will underpin the invitation to tender issued to industry.

•

Provide the benchmark against which analysis of trade-offs,tender assessment and acceptance is conducted.

•

Underpin the business case for Initial Gate and, along with the SRD, Main Gate approval.

•

Provide the criteria against which the final solution will be validated.

•

Maintain the link between the changing needs and achieved capability throughout the life of the equipment.

38

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

System Requirement Document (SRD) (prepared and owned by the IPT) The SRD defines, in output terms, what the system must do to meet user needs as stated in the URD.Together with the URD, it provides the basis for advising industry of MoD’s requirements.The linkage between individual requirements within the URD and the SRD is maintained to show the origin of every demand placed on the system and how each user requirement is met.

URD

Capture system performance Specify and structure system requirements

Capture system functions

Review systems requirements

Capture system requirements

Capture non-functional requirements

Conduct system trade-offs

SRD

Figure 11: System Requirement Document

The SRD is produced by the IPT. Some SRD work may take place ahead of Initial Gate approval in order that equipment options can be identified for Initial Gate.The SRD is updated as required to reflect trade-off decisions and approved system enhancements in response to changes in the URD. It is baselined as necessary to allow the approval of the planned system, or system upgrade, and progressive development of solutions. Although the Smart Requirements process continues through life,the periods of main effort on user and system requirements, and the resulting necessary design work undertaken by industry,are illustrated in Figure 12 following.

39

CHAPTER

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Disposal

Assessment

ISD

In-service

Concept

Contract Let

Manufacture

Main Gate

SMART

Demonstration

Initial Gate

2:

User requirements Main effort Effort

System requirements Development and feedback

System design

Figure 12:The Smart Requirements Process

The new acquisition process is designed to accommodate the reality that user requirements evolve,not only in the light of changing external events, but also as a result of further studies into system effectiveness and technical feasibility.In some cases,technical risks might suggest a programme of incremental acquisition, where risk is reduced by building the capability up in stages. In other cases, where it seems that a particular requirement cannot be met without disproportionate time or cost penalties,or a major performance improvement is possible without disproportionate time or cost penalties, the Capability Manager, in consultation with other stakeholders and the IPT Leader, encouraged to trade the requirement off either against a requirement in another project or against time and cost in the same project. The IPT Leader has the authority to trade-off between the three dimensions of a project’s time,whole-life cost and performance parameters,staying within the boundaries of expectation set by the customer. Trade-offs outside these boundaries, but within the wider bounds of validity set by the Approving Authority,need the agreement of the customer.Decisions on trade-offs,which will mostly take place before Main Gate, must be supported by the use of cost effectiveness analysis,and must be recorded within the URD and SRD.

40

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Statements of requirement will be recorded and managed at an individual level,and individual requirements will be structured to facilitate understanding of the requirement set.Within the set of individual user requirements,those which are assessed as key to the achievement of the mission need,or which are for some other reason assessed as of particular interest to management, will be identified as Key User Requirements (KURs).These KURs will be used to: •

characterise the requirement within the Initial and Main Gate Business Cases

•

identify boundaries on user requirements, to establish the performance boundaries for the Assessment Phase

•

facilitate the assessment of the impact of trade-offs, and of the gap between the evolving user requirement and the achieved (or planned) performance in the system requirement

•

measure the performance of the IPT and DPA in meeting customer requirements.

Conceptually, the set of individual user and system requirements will be in the form illustrated in Figure 12,noting that each individual system requirement is underpinned by one or more linked user requirements, and that each individual user requirement will be satisfied by one or more linked system requirements.

COMMENTARY

From an industry perspective, the adoption of the URD and SRD to replace the old Staff Targets and Staff Requirements is not in itself especially significant.The importance lies in the construction and expression of the SRD if that is to be the basis of tendering and possibly the basis of contracting.It is not yet clear whether for those commercial purposes the SRD will be expressed as a cardinal points specification,a detailed technical specification or a detailed performance specification. There are two dangers.The first is that the SRD may try to be all these things,leading to over complication, over prescription and lack of flexibility.The second is that the coherence between the URD and the SRD may become compromised as the SRD is subject to change as a consequence of tendering or contract negotiations. This is quite an important issue.If the URD is to be the basis of both tender assessment and acceptance,but it is the SRD which is issued to industry then the potential for conflict is clear, whether at the contractor selection stage or at acceptance.

41

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

The tenderers will rightly expect to be assessed on the basis of their responses to documents received and as regards acceptance, in the contractual sense, the only valid test is whether or not the contracted requirements were met.

Acceptance and In-Service Date Smart Procurement defines a common top-level acceptance process,through which it is confirmed that the users’needs for military capability have been met by the systems supplied. The Capability Manager is the Acceptance Authority.The IPT Leader is responsible for the gathering and presentation of evidence to demonstrate that acceptance criteria have been satisfied. Acceptance is a through life process, outlined in Figure 13 overleaf. At an early stage during the acquisition process the IPT Leader and the Capability Manager will agree an acceptance strategy which will identify how the acceptance process will be applied,and will enable an Integrated Test,Evaluation and Acceptance Plan (ITEA Plan) to be drawn up.Prior to reaching the stage at which formal acceptance is conducted,the audit trail back to the capability gap and user requirement will be assured through the endorsement by the Capability Working Group (CWG) of the URD and SRD. Later, at a suitable point in the programme, the build standard for production purposes will be frozen for the Capability Manager to endorse.Thereafter, acceptance is reviewed and authorised at two formal, closely related stages: •

System Acceptance assesses whether the system acquired by the IPT satisfies the SRD.

•

In-Service Date (ISD) is declared when the military capability provided by the system is assessed as available for operational use.

ISD should normally closely follow System Acceptance.However,the consideration of two distinct stages of acceptance recognises that the IPT Leader may not have authority over all elements contributing to operational availability. It does, however, remove from the IPT Leader the responsibility for ensuring the successful integration and development of the system into an operational capability. In circumstances where insufficient evidence is available to seek either limited or full system acceptance, but beneficial military capability would be provided if the system were operating in service,the Acceptance Authority may grant Initial Acceptance.This can be time limited and special support arrangements may be needed.

42

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

User and system requirement (including acceptance criteria) endorsed by end user and stakeholders

Initial acceptance Where service use required before system acceptance is achievable

Certificate of design agreed by Capability Manager

System acceptance of sample production system against SRD reviewed by Capability Manager

In-service date of usable quantity integrated with all essential supporting elements declared by Capability Manager

Figure 13: Progressive Acceptance

COMMENTARY

One of the difficulties of being at an early stage in the implementation of the SPI is that the published MoD material, such as that being reviewed here, inevitably raises more questions than it answers.None more so than in relation to this topic of acceptance.The essence of the material is that the user, represented by the Capability Manager,gets to check (and approve as the Acceptance Authority) that he has got what he asked for,certainly as measured in terms of mission capability. This is quite right. However, the Integrated Test, Evaluation and Acceptance plan will have to continue to distinguish in some way between contractual acceptance (the crucial business milestone of confirming that the work of the contract has been completed in conformance with the contract requirements) and acceptance into service (the crucial user milestone of confirmation that operational capability can be safely deployed and supported). Factions of the old PE have long desired that the two should be co-incident,but the truism remains that the contractor can only be expected and required to meet the obligations placed upon him and which

43

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

he has the freedom and authority to meet.User readiness always embraces myriad activities, only some of which are the subject of a contract. For this reason, it has always been a member of the PE project office team who has been the contractual acceptance authority. It will be interesting to see if the appointment of the Capability Manager as Acceptance Authority is intended to embrace this contractual role, rather than allocate the responsibility to the DPA or DLO staffs.

Approvals There will be a new streamlined Approvals system in the new acquisition process.The new system embodies increased delegations and gives more responsibility over the content and staffing of approval documents to the Capability Manager and IPT Leader.The staffing process itself will be simplified. There will also be a renewed emphasis on comparing the cost of procurement and support options using whole-life costs and making decisions on that basis. Independent scrutiny and reviews of approvals submissions will be more sharply focused,but the scrutineers will be more closely involved with the IPT, discussing and resolving any problems with what is proposed at an early stage. The new system replaces the existing three or four approval points by no more than two; the Initial Gate and the Main Gate. Following the Concept Phase,on which up to £5M can be spent without an EAC approval,an Initial Gate approval is required before funds can be released for the Assessment Phase.The Initial Gate is intended to be a relatively low hurdle,encouraging early and full exploration of a wide range of options and trade-offs for meeting a particular capability,and with emphasis on investment in early risk reduction work.The focus of the Approving Authorities at Initial Gate will be on confirming that there is a well-constructed plan for the Assessment Phase that gives reasonable confidence that there are flexible solutions within the performance,cost and time envelope the customer has proposed.Approval at Initial Gate implies no commitment by the Central Customer or the Approving Authorities to a project proceeding to or beyond Main Gate. Following the Assessment Phase, by the end of which typically about 15% of the initial procurement cost of the system might be spent, a Main Gate approval is required before any money can be spent in the Demonstration Phase.At Main Gate,a single technical and procurement option (but usually not a single supplier) should be recommended. Risk should have been reduced to the extent that the Capability Manager and IPT Leader can,with

44

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

a high degree of confidence, undertake to deliver the project to narrowly defined performance,cost (procurement and,in due course,whole-life) and time parameters. Potential industrial or collaborative issues must be addressed no later than Main Gate,in consultation with the DTI and,as necessary,other departments.The parameters agreed at Main Gate would be those used for external reporting and performance measurement with the Treasury and the NAO. Equipment projects are divided for approvals purposes into the following four categories:

Category

Procurement cost

Approving Authorities

A

Above £400M

Approved by the EAC (CSA, 2nd PUS, VCDS, CDP and CDL), then Ministers.

B

£100M to £400M

Normally approved at 2* level by delegates of each EAC member. However, members of the 2* Approving Authority may, at their discretion, formally delegate responsibility for approval to a lower level for specific projects. An executive summary of all submissions in Category B must be copied to Ministers.

C

£20M to £100M

Normally approved at 1* level by delegates of each EAC member. However, members of the 1* Approving Authority may, at their discretion formally delegate responsibility for approval to a lower level for specific projects. An executive summary of all submissions in Category C with procurement costs over £50M must be copied to Ministers.

D

Under £20M

Normally approved at 1* level or below by delegates

(Under review for

of each EAC member. Members of the 1* Approving

increase)

Authority may delegate some or all of their responsibility for approval of Category D projects to a lower level.

45

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

A business case, initiated by the Capability Manager and replacing the old dossier, will make the case for taking the project forward at each Gate. It is likely to be between 20 and 30 pages long, depending on the stage and category of the project.An executive summary of the case will be used for briefing Ministers and senior officials.There will be much greater emphasis on oral presentations, discussions and meetings with the Approving Authorities, or their delegates or representatives, to clarify key points and resolve difficult issues. For Category C Initial Gate and Category D Main Gate approvals,the business case will normally be shorter (no more than ten pages).There is no formal Initial Gate for Category D projects, which can proceed to the Assessment Phase if the customer and IPT Leader can agree a suitable CSA;Assessment Phase activities and deliverables; and cost, time and performance parameters for the Assessment Phase and the project as a whole. In such cases, the relevant budget holder may approve expenditure of up to £4M before Main Gate. After Main Gate, no further Approvals are required provided the project remains, and plans to remain, within the bounds set at Main Gate. Selection of a prime contractor may well be made after Main Gate. While the outcome of this, the resolution of any industrial or collaborative implications,and an appropriate presentation strategy,may need to be agreed with or communicated to the relevant stakeholders and Ministers, no further central approval should normally be needed.

COMMENTARY

The changes being made under SPI to the appropriate process will,in time,have the most far reaching impact (for the better) on the way in which things have been done in the past.There appear to be three key messages.The first,that there will be only two approval points – the second point (Main Gate) effectively delegating power to the IPTL to get the job done – will do much to reduce the stop/start problems of major projects that have reached their ready-to-roll state. This power in the hands of IPT Leaders who have and exercise the specified characteristics, should make an astonished difference to the success rate of projects. The second message, that category B projects and below, can be approved at no higher than two star level will also do much to eliminate the bureaucracy and delays of applying a committee based approvals system to most projects.The final message is that industrial issues will be an overt agendum at no later than Main

46

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Gate and will involve DTI and other departments as necessary.This appears to confirm that major defence project decisions will take much more account of UK industrial, infrastructure, strategic and economic arguments. If correct, this is indeed a most welcome change of emphasis.

Incremental Acquisition Incremental Acquisition provides for equipment capability to be upgraded in a planned way, from the initial delivery of a specified baseline capability, to eventual achievement of a higher full capability.The diagram below illustrates this approach.

Main Gate establishes planned ‘full’ capability ie baseline plus envelope of planned increments and the overall project cost limit

Concept

Assessment

Main Gate

Finalise baseline capability

Define 1st increment

Define 2nd increment Disposal

Demonstration

Implement baseline capability

Implement 1st increment

Implement 2nd increment

Operational feedback Equipment in-service

Figure 14: Incremental Acquisition

47

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

The advantages of acquiring equipment in this stepped way are: •

a reduction of the risk inherent in introducing large improvements in capability through a single major technological step

•

systems can be developed and put into service which can progressively incorporate evolving technology as it becomes available

•

conversely, avoiding early commitment to a specific approach which may result in the delivery of obsolescent equipment.

Incremental Acquisition should be considered in drawing up the procurement and support strategy for all projects.These strategies will need to take account of research programmes underway or planned in the Applied Research Programme or in other areas. Incremental Acquisition is particularly beneficial in the acquisition of all systems with a significant element of IT hardware and software (including commercial off-the-shelf equipment), and of high performance sensors or other sub-systems in areas where technology is evolving rapidly. It is also particularly relevant to the acquisition of platforms that hold or are designed to hold several weapons systems or other sub-systems.However,Incremental Acquisition may also have disadvantages, such as a lack of competitive pressure for later increments and the possibility of managing a non-identical fleet. Where it is possible at Main Gate to identify within narrow limits the time, cost and performance to be provided at the last increment it will normally be possible to approve the complete project at that stage.Where increments after the first are less well defined, it may be possible for the Approving Authority to delegate authority for approving subsequent increments.

COMMENTARY

The principles of Incremental Acquisition are widely supported.The progressive increase in capability through discrete incremental steps,each of which is in itself low risk, must be a more sane approach than attempting operational changes in a ‘big bang’ style. However, the actual pathway to successful Incremental Acquisition is not yet clear and Figure 14 illustrates two areas which will require careful thought and handling.The narrowness of the PCT parameters demanded at Main Gate seem to contradict the principle of low-risk increments.In the example shown, if the second increment can be narrowly defined at Main Gate the implication is that it is low risk and hence could be deployed earlier. If it is high risk, then its

48

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

PCT parameters may be wide and it could not,by definition,be approved at Main Gate.The suggestion that,in this situation,approval could be delayed but delegated is most welcome. It is this sort of flexibility that will make SPI a success.This is especially so given that the time between Main Gate and Disposal can be in excess of twenty years. The second unknown is the process between ‘Define Increment’and ‘Implement Increment’. As Downey would have handled it, the increment may have had its own cycle thus:

Baseline

Increment

FS

PD1

PD2

Dev

FS

Prod 1

PD

Prod 2

Dev

Prod

Support

Support

It is hoped that SPI does not assume that capability increments can leap from definition to implementation without some interim step of risk reduction,development or demonstration.It is also not yet clear whether what was called ‘mid life enhancements’ are dealt with by Smart Procurement. The implication of the New Acquisition Cycle and the concept of Incremental Acquisition as described is that the whole project is well mapped out by Main Gate approval, even if the narrow definition of certain increments has to be left until later.Traditionally,mid-life enhancements would come about as a result of the emergence or detection of a new threat or perhaps by the arrival of new technology which could dramatically improve intrinsic problems of reliability or availability.By definition such could not be foreseen at the time of original project planning and approval.Whether Smart Procurement will deal with such demands as post Main Gate increments with approval delegated, or whether they must perforce be treated as new projects remains to be seen.

49

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Smart Procurement and collaboration An increasing proportion of equipment expenditure is likely to be spent on collaborative projects. Smart Procurement will bring some advantages over previous practices for UK teams engaged in collaborative projects.The UK will have more flexibility than before over trading-off time, whole-life cost and performance.In addition,the relationship between UK project staff and industry is likely to be closer to that found in our main European partners than our previous arms-length approach. However, there will also be challenges.The tough performance targets placed on the MoD may make the UK less ready to accept a risk of a cost or time overrun.To meet these targets all the implications and risks associated with collaborative projects will need to be properly considered and planned for. There is a strong argument for harmonising international standards and methods around the Smart Procurement approach. DPA staff have been discussing with OCCAR,the new European Armaments Agency,their developing procedures and how they fit with Smart Procurement.

COMMENTARY

The good news about international collaborative projects is that by sharing the cost burden between nations,operational capability can be acquired by individual nations which each could not otherwise afford at all.The bad news is that problems of geography, national politics, industrial politics, local politics, language, priorities and policies usually make international collaborative projects grossly inefficient.This phenomenon does not happily co-exist with the goals and spirit of Smart Procurement. Implementing the SPI in the UK alone will take the most enormous commitment of sustained energy by the MoD and the main defence contractors.The MoD is right to be cautious about the prospects and problems of aligning its initiative with colleague agencies elsewhere in Europe.

50

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Smart Procurement and Public/Private Partnership (PPP) Public Private Partnership (PPP) is a generic term that covers Competing for Quality (CFQ), the Private Finance Initiative (PFI), and Partnering.The first wave of CFQ projects is reaching its end, and Partnering is evolving. PFI, although still new to many parts of the DPA and DLO, is an important part of the Government’s efficiency policy, as are the other forms of Public/Private Partnership.MoD Ministers have endorsed the use of PFI to provide services throughout the Department and IPTs should only consider using MoD’s own capital funding resources if PFI has been demonstrated to be unworkable, inappropriate or uneconomic. The Capability Working Group should carefully explore, with the embryonic IPT,the scope for PPP as a procurement option from the earliest stages of the concept phase.PPP aims to provide better value for money by allowing the MoD to focus on its core task of providing operational capability, to access the best private sector capabilities,to transfer risk to the private sector and to benefit from additional capital investment.It allows the private sector to provide certain capabilities and services where they can take advantage of their freedom to invest and their skills in balancing cost,risk and return. PFI involves contracting for a service, with service-based payment mechanisms, where substantial capital investment is needed in an asset essential to deliver that service. Partnering is a more flexible concept, where there is greater uncertainty or where the benefits to MoD come through harnessing complementary skills or knowledge.In both cases customer awareness and understanding needs to go beyond pure technical knowledge. Management structures and incentives at all levels need to be established such that the relationship is constructive and predisposed to solve problems rather than apportion blame.Nevertheless,there is no substitute for a clear and robust contract which specifies outputs, risk apportionment, and processes for change and dispute management.A PFI deal will be stronger on the outputs and apportionment of risk,a Partnering deal will focus most heavily on the processes to manage uncertainty. In this context, risk refers to foreseeable possible future events and uncertainty refers to unforeseeable events. For a PFI project, the MoD specifies its needs in output terms, based on the required capability. Smart Requirements lends itself to this process, although the bounds and constraints placed on the programme within the URD will need to be closely scrutinised to ensure that the potential for PPP

51

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

is fully explored. Bidders will then have the maximum possible flexibility to adopt innovative approaches or introduce practices from other sectors of industry. The formal analysis of a PPP proposal can be a substantial task. PFI is demanding but has realised savings of up to 40% in forecast costs compared with other forms of procurement. The following are rough indicators of the scope for PPP in a project: •

A requirement for capital investment now or in the future

•

A substantial service element in the requirement

•

Scope for innovation in the delivery of the service

•

MoD risks which could be better managed in the private sector

•

Scope for long-term contracts.

Projects considering a PPP/PFI approach will need to be aware of a number of features that differ from other procurement approaches: •

The need to develop a public sector comparator,representing the cost of meeting the requirement by non-PFI means

•

Consultation with the Trade Unions,as a PPP/PFI approach is likely to have an impact on civilian staff

•

The impact of EC procurement directives

•

The use of pre-qualification questionnaires and outline proposals

•

A close MoD/contractor relationship during the in-service phase.

To minimise the possibility of wasting time and effort in projects where PFI is inappropriate, and to maximise the chances of extracting best value for money in projects that pursue PFI, it is very important to involve PPP and PFI expertise at the earliest stages of a project,consulting the DPA Private Finance Unit (for DPA projects) or the PPP Unit in London (for other projects and policy questions). Further details on PPP/PFI can be found in the PFI Guidelines for MoD and associated documents, which are available on the MoD web site and the AMS.

52

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

COMMENTARY

The statements on PPP,and in particular on PFI,are very welcome for their pragmatism. PFI is not appropriate for many defence projects and the recognition that time and money should not be wasted pursuing inapplicable cases is sound.The material gives the MoD perspective.The commercial perspective is not dissimilar. At one end of the spectrum there is a class of service provision projects which can be made subject to PFI but where the primary government motive appears to be to spread the cost over a long period in order to minimise short-term PSBR needs.This is all right for the commercial concern where the benefit is long-term revenue security for perhaps modest rates of profit.At the other end of the spectrum there are service projects which have the following features:a capital infrastructure which can be exploited outside of the MoD project;scope to increase the customer base and customer usage;scope to reduce future costs with new technology. These features support a strong case for a PFI deal.A greater recognition by the MoD of the commercial realities of PFI is a good step forward.

Teamworking, competition and incentives Teamworking with industry A better relationship between the MoD and industry is one of the key themes of Smart Procurement.There is a lot to be gained: •

Membership of an IPT will provide industry with a clear understanding of the required capability and allow early and positive participation in the key process of trading-off time, performance and whole-life costs.This will result in a requirement which both meets the MoD’s capability need and is better tuned to industrial and technological reality.

•

Industry’s improved understanding of the customer’s requirement will reduce the number of iterations required to reach a satisfactory proposal, saving industry and the MoD time and money.

•

Team working will encourage a joint approach to risk reduction throughout the Acquisition Cycle; particularly before Main Gate, enabling the subsequent demonstration and manufacture phases to proceed more quickly and with confidence that targets will be met.

53

CHAPTER

•

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

A new culture of team working with industry will encourage critical examination of current and/or proposed contract arrangements and working practices to see if they can be altered to provide benefits to both the MoD and industry. For current contracts this process is known as gain sharing.

Competition and working with industry The words ‘partnering’and ‘teaming’will often be used to describe this new relationship, although its precise form will, in face, vary according to the stage that a project is in. But, whatever it is called, it is essential to understand that an improved relationship with industry and the continued use of competition will work together. Obtaining the greatest advantage from competitive leverage, at prime and subcontract level, remains our primary tool in defence procurement. Experience of partnering and teaming in industry,both within and outside the defence sector,shows that there is no conflict between robust contracting and mutually beneficial team working. The aim, therefore, will be to continue, wherever it provides best value for money,to select contractors by competition.In the early stages of the Acquisition Cycle,firm price information is unlikely to be available,so other criteria for selecting contractors comes into play.These include a company’s track record on similar projects,proposals for reducing cost on a continuing basis or enhancing value through the introduction of new technologies, more effective use of plant or site capacity, synergy with other business activities,proposals for supply chain management (including appropriate use of competition and strategic partnering at subcontract level), and proposals for continuous benchmarking of performance to provide reassurance that the product or service being provided remains ‘best in market’. Industry should be able to demonstrate that their own processes for gathering and implementing best practice will benefit the MoD and that a long-term partnering or teaming arrangement is consistent with their wider corporate objectives.Timing of contractor selection is also an important issue in which the recognised benefits of continuing competition will have to be weighed against the possible advantages of an earlier decision, such as the more efficient use of MoD and industry resources and those benefits of partnering which can only arise when the MoD and the contractor are in a one-to-one relationship.There will be no single model for this selection process; the procurement strategy for each project will have to be developed by the IPT for approval at Initial Gate and confirmed or amended at Main Gate.

54

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

Incentives and gainshare The AOR identified that the MoD’s use of contractor incentives were ineffective in encouraging improvements in contractor performance. An MoD industry group has produced a joint statement of intent to which both sides will work to nurture the greater and more effective use of incentives.The statement recognises the cultural shift required in the attitudes of the MoD and industry and encourages both sides to think radically and imaginatively about means of incentivising performance. For new contracts, these may be positive (rewards for good performance) or negative (sanctions in the event of failure to perform contractual obligations).Positive incentives may include paying bonuses where value is added for the MoD beyond the baseline contractual requirement,and more flexible use of interim payment arrangements by which any retention against the contract price is adjusted to reflect good or poor performance.Positive incentives need to be balanced by a clear recognition that sanctions are still available to the MoD and may be applied more rigorously than in the past if, after due warning, contractor performance is not up to the mark. Where reopening and examining current contracts will bring benefit to both the MoD and industry, this should be done using gainshare.The concept of gainshare is central to Smart Procurement.There is no prescribed manner in which gainshare opportunities might be identified, assessed and implemented, except that its application is focused on existing contracts. Gainshare opportunities may offer one or more of accelerated delivery of the product or service, performance changes, and reduced costs – faster, better, cheaper.Technology advances, changes to trial programmes, innovative support arrangements,and income stream opportunities from the transfer of assets are examples of opportunities that may develop while a contract is in action.Effective team working will present the greatest scope to identify mutually beneficial opportunities from these opportunities.The benefits arising will be shared between the MoD and the supplier.Sharing arrangements are not pre-determined and will take into account factors such as the balance of advantage arising from gainshare.

55

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

COMMENTARY

The MoD text rightly points to the benefits of MoD/industry teamworking,placing emphasis on the advantage that will accrue to (implicitly) the user through the greater industry understanding that will arise from membership of the IPT. It is to be hoped that MoD staff will likewise understand better the aspirations of the company in undertaking the project. It is easy for any industrialist to list these: •

Profit equal or better than that budgeted at contract award

•

Cash-flow equal or better than that budgeted at contract award

•

Sales achieved as budgeted or better

•

Direct or indirect order book growth

•

Development of intellectual property for exploitation elsewhere

•

Increased marketplace standing

•

Enhanced product and company reputation

•

Acquisition of new skills.

In the Author’s opinion the true mark of success for SPI will be seen when genuinely joint IPTs are working together for the achievement of their mutual objectives. The NAO will applaud the MoD for turning the tide (with industry’s help) of defence project delays and failures.The CBI will applaud industry for improving business performance (with the MoD’s help) on major defence contracts. Whether in competition or otherwise there are few who would disagree with the need for robust or taut contracts.However,it is undeniable that achieving this state has a number of drawbacks. Firstly, the negotiation of a robust, taut contract can take typically many months or on a major project up to a couple of years.Secondly, the negotiation of tough terms forces the parties into dramatically opposed positions. This puts great strain on mutual trust and confidence and the transition into productive,co-operative behaviour the instant the negotiations are completed and a contract signed is no easy feat.Thirdly,the need to absolutely dissect and differentiate between the risks and responsibilities of the two sides hardly promotes the sharing of ideas and joint problem solving which are needed in practice.These problems are exacerbated as the prime contractor strives to complete parallel negotiations under the same conditions with his major subcontractors.There are solutions to each of these problems,but each requires the MoD to respond to its own challenge to be more innovative in its commercial approach.The delay to project launch could be eliminated by the use of limited short-form contracts aimed at getting work under way whilst negotiations are concluded. Making the first major payment milestone the signature of the full contract is usually sufficient to dissuade the contractor from exploiting the situation.The distrust that can be generated by negotiating the tough conditions could be assuaged if equal time was spent between incentives and penal-

56

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

ties (see below).The separation of risks and responsibilities could be attenuated to permit a prescribed category of joint action areas for which risk and responsibility are genuinely shared.If joint action succeeds,both sides win.If joint action fails costs lie where they fall, end of story, no finger pointing. On the subject of incentives the MoD gives some weight to ‘the cultural shift required in the attitudes of the MoD and industry and encourages both sides to think radically and imaginatively about means of incentivising performance’.The MoD also remarks that incentives have been ineffective and that contract conditions discouraged innovative solutions. In a conventional MoD contract the incentive has been limited to the opportunity to be paid the contract price provided 100% performance is delivered. Effort tended to be concentrated on ‘negative incentives’: •

Delay, withhold or recovery of payments

•

Set-off against other contracts

•

Price reduction

•

Liquidated damages

•

Threat of termination

•

Termination

•

Black mark on other tenders.

The opportunity to avoid a penalty (the best incentive according to certain MoD individuals) has not worked for two reasons.Firstly,corporate behaviour is in this sense not dissimilar to human behaviour. Genuinely positive incentives work much better than penalties. Secondly, most companies do not enter into contracts with the intention of incompetence or negligence. Usually, the reason for delay is over-optimism about the gravity of technical issues.The over-optimism may be innocent or it can be the result of the MoD aggressive management of competition. Either way once greater than expected technical difficulties are encountered the effectiveness of penalties is extremely limited.Their effect is to attract management attention with the result that better or greater resources may be dedicated to the problem area.This is right and proper. However, it is difficult to avoid the obvious weakness that causing a company financial damage does not of itself contribute directly to the resolution of technical issues. Of course, the right to impose penalties is much more to do with preserving legal rights and being accountable to Parliament if things go wrong. Quite right,but how much better if acquisition contract terms and joint IPTs were designed to achieve success in the first place.This indeed is the goal of Smart Procurement.So what of progress in the development by the MoD of a balanced incentives/penalties code of practice? Sadly, the trend appears to be as before with more thought being applied to the negative side.More burdensome warranties,

57

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

more use of IPR terms to establish MoD exit strategies, tougher payment terms, and tougher termination clauses all appear to be attracting the most attention from the MoD.The one bright spot is the MoD’s willingness to build in flexibility (positive and negative) on payment retentions. Under such an arrangement, the amount of payment retention (against final delivery,acceptance etc.) can be adjusted after the contract is awarded,according to the success or failure rate of milestone achievement.This is an interesting innovation,given the importance of cash flow to most companies.But where is the discussion about delivery bonuses to balance liquidated damages? Where is the discussion about a contractor’s right to lost anticipated profits resulting from MoD acts or omissions? Where is the discussion about increased rates of profit for exceeding technical targets? These subjects may feature in individual contract negotiations,but not so at the policy level.Indeed,the only current policy debate affecting profit rates is in connection with the MoD’s refusal to adopt the 1999 profit formula.The new MoD policy on dealing with inflation costs can be argued as little more than a further attack on profits. In summary, it is right for the MoD (or any procurement authority) to pursue a twin track of co-operative team working with its defence contractors, backed up by the ability to fall back on the terms of a robust,taut contract.However,the ambition of SPI is jeopardised if too much emphasis is placed on the negative aspects of robust, taut contracting. It must be possible to construct contracting policy so as to under-pin and promote the aims of SPI without at the same time undermining the essential legal rights of both parties to the contract.

Financial changes resulting from Smart Procurement There are four main areas of change:

IPTs will provide financial management information to the Central Customer IPTs must work closely with the Central Customer on resource allocation and consumption to ensure there is sufficient funding provision to deliver the required outputs.To allow the Central Customer to monitor progress and make informed decisions on resource allocation between projects,the IPT will regularly provide information on actual and forecast expenditure compared with approvals, plans and budgets. In-year, it will be the Central Customer who decides any changes to project progress and deliverables

58

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

or levels of support services judged necessary by the IPT to maintain expenditure within budgeted levels. IPTs will also have to provide information about the cost of outputs to support informed decisions on priorities by the Front-Line Second Customer.

Project budgets will be set by the Central Customer The customer decides how much is to be spent on individual projects. In the annual planning and budgeting process,the Central Customer will screen the equipment procurement costings proposed by the IPT Leaders and allocate, in the ten year Equipment Plan and related four year short-term plans, the financial resources agreed with the IPT Leader for each project. The Second Customer will set the required levels of equipment availability, which the IPT will cost.Following negotiations,the agreed levels of funding and availability will be set out in CSAs and reflected in the short-term plan.

IPTs will plan and account for their expenditure as necessary in both the DPA and DLO budgets The IPT will be responsible for expenditure on both new procurement (generally DPA funds) and in-service support (predominantly DLO funds). The IPT Leader’s accountability to the respective TLB Holders (CDP and CDL) is for keeping expenditure within allocated resources while meeting the agreed outputs and ensuring value for money, propriety and accurate accounting.

IPTs will be responsible for whole life cost forecasting of the complete project The IPT will maintain costed project plans covering an equipment’s whole life cycle and reflecting the full cost of the project, which may involve elements outside the DLO and DPA TLBs.The IPT will be responsible for ensuring the consistency,completeness and coherence of all cost forecasts and funding provision included in forward plans, using the Programme Responsibility Matrix within the TLMP.

59

CHAPTER

2:

SMART

PROCUREMENT

GUIDE

–

MAIN

ELEMENTS

COMMENTARY

The financial changes leave in place much of the long existing financial controls. The ten-year Long-Term Costing (LTC) is replaced by the ten year Equipment Plan (EP).The four year Public Expenditure Survey Committee (PESC) finance plan is replaced by the four year short-term Plan.In-year accounting,principally through the quarterly Forecasts of Outturn, is retained.The principle change appears to be the control and influence given to the Customer.Creating a stronger link between Customer through the CSA and the DPA/DLO acquisition contract to the source – the defence companies – of much of the actual project expenditure will be a good thing.

60

Smarter contracts B L A M E V C O - O P E R AT I O N G A I N S H A R E A N D PA I N S H A R E CONTINUOUS IMPROVEMENT AND CONTINUOUS TRADING-OFF A STEP FORWARDS OR BACKWARDS? SIMPLER, CLEARER CONTRACTS T U R N I N G PA RT N E R I N G P R I N C I P L E S I N T O P R A C T I C E

chapter

3

Chapter 3: Smarter contracts

Blame v co-operation The MoD published material on Smart Procurement is fairly limited on the subject of Smarter forms and types of contract.The thrust of the MoD/CBI deal on Partnering is that closer co-operation between the MoD and its contractors will reap benefits for all.This theme is one of the many strands of Smart Procurement.In both cases the MoD has been hesitant in taking the principle and turning it into different forms of contract.The reason for the hesitancy is quite straightforward.One component of procurement policy in the pre-Smart era was that of ‘taut contracting’. This component has been retained. At its mildest it means that any contract should clearly delineate the risks and responsibilities of the MoD and contractor. At its strongest it means that any contract must clearly assign all risk and responsibility to the contractor,regardless of common sense or commercial realism.In the milder case the purpose is clear.When things go wrong,the finger of blame can accurately and indisputably point in the appropriate direction.In the stronger case,the finger will always point at the contractor.Industry would hardly argue about the contractual sense of the former.The latter case has been the source of some industry/MoD contention for some years.As to which interpretation applies, the question has been left to the discretion of individual branches.The underlying reason behind the policy has not changed since the arrival of Smart Procurement.When major projects go wrong (combinations of lateness,low technical achievement and cost overruns) the MoD is itself rightly concerned and comes under the fiercest criticism from the NAO,the PAC,Parliament,Treasury and the Press.The two questions that always emerge are:Why has the procurement process failed? And why can’t the contractor be held to blame? Smart Procurement is the latest in a line of initiatives that aims to answer the first question.The answer to the second question lies of course in the nature of the contracts that the MoD places.If only the ‘right’ form of taut contract can be placed then the contractor can always get the blame! Industry’s argument is somewhat different.It is a widely held industry axiom that successful projects are characterised by ‘never having to get the contract out of the cupboard’.That is, if the behaviour of the parties is of the right nature, then neither the form of the contract, nor its detailed content, has very much bearing on events.There is no doubt that the MoD agrees with the philosophy. However, the difficulty for any publicly accountable body and indeed for lawyers advising

62

CHAPTER

3:

SMARTER

CONTRACTS

business managers is that,in its function as an insurance policy,the contract must be of good stern stuff in case the dreaded day should arrive when the document must be hauled out, dusted off and used to bludgeon the opposing side. Thus we find the MoD and industry absolutely of one mind in the newly found importance of aligned, positive, co-operative behaviour, but both contingents perplexed as to what difference, if any, should be made to the form of contracts used for defence procurement for larger projects. The mutual suspicion that surrounded early discussions in 1994 on partnering still subsists.The MoD’s concern is that it is an industry device to muddy the contractual waters with the contractor’s aim being to avoid his proper liabilities.The industry concern is that it is an MoD device to secure substantial additional (to accepted normal practice) de facto rights and access to information with the aim of having much better ammunition with which to attack the recalcitrant contractor.Inevitably,these stereotyped attitudes will take time to ameliorate and it would be wrong to give the impression that such sensitivities are as strong now as five years ago. Nevertheless we are left with the question as to the right form of contract because,in the Author’s opinion at least,there is a causal link between the behaviour of the parties and the nature of their contractual relationship.

Beha v i o u r

Blame based contract

Beha v i o u r

Co-operation based contract

Behaviour

Degrades

Enhances

Figure 15:The link between behaviour and contract It seems that the character of the contract must dictate the nature of the behaviour. If, when things are going well, a glance at the contract shows that benefits (not anticipated at the time the parties made their bargain) are being realised but are all falling to one side then perhaps the non-beneficiary may feel that he is losing out. If, when things go awry, the contract merely aids finger pointing (and of itself does nothing to guide or motivate the parties towards problem resolution) then perhaps each party will always behave with an eye to avoiding contractual

63

CHAPTER

3:

SMARTER

CONTRACTS

consequences. On the other hand, if the contract balances both sides’‘gain’ and ‘pain’ when things go well or not well respectively, then perhaps both sides will work together to maximise ‘gainshare’ and minimise ‘painshare’.

Gainshare and painshare The simplest form of gainshare/painshare arrangement is in the sharing of financial liability for the performance of the contract. In a firm price deal the MoD’s liability is limited to the payment of the agreed price in return for complete performance. The contractor has an unlimited liability to spend whatever it takes in delivering complete performance. All profits and losses are to the contractor’s account. The MoD shares in neither. The MoD may be motivated to assist the contractor in order to speed up performance but will hesitate to do so for fear of disturbing the ‘tautness’ of the contract.A share of any financial benefits may make the gamble worthwhile for the MoD.The contractor may feel that MoD assistance is worth the sacrifice of a share of potential profits derived from savings. MoD policy allows such arrangements to be made in the form of Target Cost Incentive Fee (TCIF) contracts. A more detailed description of these arrangements together with some Smart suggestions is provided in Chapter 4. At this stage it is important to note the significance of the phrase gainshare/painshare.For TCIF arrangements to be successful there must be a willingness to share not only the good times but also the bad times,otherwise there is no balance.TCIF type schemes are in essence sharing the financial risk in the performance of the contract.The contractor must know that his MoD ally will not desert him if contract costs exceed expectations,just as the MoD must know that the contractor will not lose interest in sharing if contract costs come in well under expectations.

Continuous improvement and continuous trading-off If financial gainshare/painshare is to operate, it is necessary to consider the cost drivers that make the principle of sharing appropriate.If the cost driver was almost entirely limited to the contractor’s efficiency (for example the reject rate in a repetitive manufacturing operation) then sharing would not be appropriate.There would be no reason for the MoD to be financially penalised for poor contractor efficiency and there would be no reason for the contractor to offer the MoD any benefit from his own efficiency improvements.However,in major defence projects,contractor efficiency is unlikely to be the major or single cost driver,particularly while contracts continue to be let for more than one project phase at a time.Whilst most compa-

64

CHAPTER

3:

SMARTER

CONTRACTS

nies have a policy of continuous process improvement this is unlikely to be the major influence on contract costs in a major project.The major factors are likely to include: •

Technical complexity

•

Specification interpretation

•

Choice of major subcontractors

•

Complex programmatics

•

Intractable engineering problems

•

Immature understanding of impact of new technologies

•

System complexity

•

Complexity of derived requirements

•

Complexity of software design and integration

•

Technology and product obsolescence.

It is not difficult to see that these matters touch upon both the processes and methods by which the work is to be executed and the end result. In both cases, the MoD has a major contribution to make,if only it dare do so.In the first instance, it is undeniably the case that the contractor does not have a monopoly on good ideas or in innovation on problem solving. No amount of taut contracting could make this otherwise. It is obvious that the knowledge, wisdom and experience of MoD staff (general, air and navy staffs; civilians; scientists) should be brought to bear in the execution of contracts.The MoD should be a participant and not a monitor, provided it is a pro-active co-operative participant. The second point – the end result – is equally controversial. Conventionally, the MoD will use the pre-contract phase to thrash out with the contractor the contractually required end result and will aim to define it in detail.Both points are designed to underpin contract tautness. In Smart Procurement, arguably, both are flawed. Remembering that Smart Procurement positively allows rigorous performance, cost and time (PCT) trade-offs pre-contract – all in aid of the search for optimum value for money – then surely such process can and should continue during the contract.The search for maximum value for money should not cease at the contract award.The search is a continuum that commences with the first steps of the acquisition process and continues throughout the project life cycle. Contract award is merely an arbitrary time point on that continuum. Of course that time-point is not entirely arbitrary. It is the conflux of sufficient certainty with the time (to delivery) imperative.But the principle of the value for money continuum is valid. The PCT trade-off cannot happen without close MoD involvement.

65

CHAPTER

3:

SMARTER

CONTRACTS

If a continuous in-contract PCT trade-off is to be permitted then by deduction it must also be the case that there is diminished merit than hitherto in specifying the requirement in inordinate detail in the contract in the first place. A contract specification set at a cardinal points level would be quicker to agree,it would be more flexible and it would be more useful if continuing PCT trade-off is allowed. If tied to a suitably flexible form of contract (see Chapter 4) then there is a basis for a co-operative commercial deal.

A step forwards or backwards? Let us examine the proposition for Smarter contracts.It is contended that complex defence projects demand contracts with in-built flexibility which,of themselves, aid the promotion of co-operation and joint endeavour through IPT working. It is suggested that contract specifications could be written at a higher level than is conventional, allowing flexibility (arguably a measure of uncertainty). It is suggested that the MoD should be involved appropriately in contract execution. It is held that PCT trade-offs should be allowed during contract performance.Do these measures represent a step backward from taut contracts or a step forward to a more productive relationship? It does seem that if the MoD wishes to do more than stand back and watch the contractor sink or swim then there may be some compromise to the clinicality of a conventional taut contract.However,any such compromise may be a worthwhile sacrifice for the net and mutual benefits of changed behaviour,joint commitment to aligned mutual objectives and flexible contracts, all of which are glued together with appropriate gainshare/painshare arrangements.

Simpler, clearer contracts Apart from esoteric questions about the possible compromise to the traditional principles of taut contracting that may be the consequences of doing things differently, there is the somewhat easier question of simplifying and clarifying MoD contracts.Three ideas should be considered: •

The greater,more positive contractual use of Statements of Work (SOW)

•

A separation of the two present functions of the ‘terms and conditions’ (Ts & Cs)

•

A more holistic view of the contract.

66

CHAPTER

3:

SMARTER

CONTRACTS

The substance of a major project can be said to comprise the desired output and the work required to achieve the desired output. A feature of MoD taut contracting has been that the MoD is interested in expressing only the former of these in the contract, usually as a detailed specification of some sort. If clinical tautness is the aim, then this approach is correct.The MoD’s interest is in the result and not the means by which the contractor achieves the result.However,this has always been, to some extent, a fallacious stance. Not the least reason is the MoD’s interest in, for example,selection of subcontractors and products;verification and validation of the work in progress and general monitoring.If we now add the Smart context and some of the ideas proposed earlier – continuous PCT trade-off for example – then it becomes much more obvious that the contract should embrace both the ‘what’ and the ‘how’. If the ‘how’ is expressed as a SOW then the MoD has every opportunity to understand and comment upon,in detail,the contractor’s proposed methodologies,to have its own contribution to the work noted in a coherent form which is integrated with that of the contractor and to critically examine all aspects of work with a view to eliminating low value added activity. Of course the danger is that the agreed SOW may not be compatible with the agreed specification.The MoD may have inadvertently agreed a SOW that represents insufficient work to achieve the specification.The contractor may find himself incurring cost to complete the SOW when the specification has been achieved, thus losing what otherwise might have been an additional profit opportunity.These are not big issues.They can be resolved by simple statements of precedent.More importantly,a culture of continuous improvement that includes a constant quest for eliminating low value added work, tied to an appropriate TCIF scheme, can allow regular review and revision to the SOW. Turning to the matter of the so-called Ts and Cs,the typical MoD Ts and Cs section of the contract contains a mixture of standard contract conditions (the DEFCONs); standard procedural matters (the DEFFORMs); engineering and other standards (e.g. the DEFSTANs) and specially drafted non-standard conditions. Analysis shows that the content of this mixture covers three topics.There is useful and usually non-contentious boilerplate material such as lists of contractual definitions. There are conditions which establish the allocation of risk and liability.Finally,there are provisions which cause work to be done.It can be difficult to adduce the respective work,risk and liability responsibilities of the parties imply because of the way in which the Ts and Cs section of the contract is assembled. Ignoring the noncontentious boilerplate,a separation of risk/liability issues from work requirements would also assist in the financial treatment of each negotiated allowance for the former and agreed estimates for the latter.Furthermore all Ts and Cs requirements for work would then readily be incorporated in the SOW leaving Ts and Cs to deal with risk and liability, representing commercial best practice.

67

CHAPTER

SOW

3:

SMARTER

‘Ts and Cs’

CONTRACTS

Ts and Cs

Work

Risk/liability

Estimates

Allowances

Figure 16:Terms and conditions

Price and Payment

Technical

Project Management

Programme

Finance

Specification

Contracts

Ts and Cs

Such a separation of the functions of the Ts and Cs section in combination with the use of SOW would assist in adapting a more holistic approach to the contract. At present there is a tendency to view the contract as a series of discrete compartments with a separate function owning individual compartments, for example:

Figure 17:The present view of the contract

68

CHAPTER

3:

SMARTER

CONTRACTS

The way of working has been for the respective MoD and contractor specialists to agree their compartments,the sum of the partially unconnected parts equalling the whole.A better model would be as follows:

SOW

Price and Payment

Owned by the IPT

Specifications

Programme

Deliverables

Ts and Cs

Figure 18: A better model In the second model (Figure 18), price (and payment) relates clearly to both a ‘technical baseline’(the SOW which binds together the substance of the project) and a commercial baseline (the Ts & Cs).

Turning partnering principles into practice The 1998 MoD/CBI guide to partnering is a comprehensive description of the creation, agreement and management of partnering relationships in the defence community.It should be mandatory reading for all involved in higher value defence projects and is essential as a companion guide to anyone learning to introduce Smart Procurement. However, the two doctrines of Smart Procurement and partnering have not been as closely linked in the roll out of SPI (which came after the partnering guide) as would ideally have been the case.The reason is simple. The 1998 Partnering Guide (and its precursor published in 1996) was primarily aimed at the provision of services and the SPI, with its central theme of operational capability, is primarily aimed at large value acquisition of equipment or systems.The two seem to be addressing fundamentally different things – the supply of services and the sale of goods.This is a fallacy.An increasing element of the supply of services will be in logistics support (note: equipment + logistics = capability) which features strongly in the through-life theme of SPI. So SPI must

69

CHAPTER

3:

SMARTER

CONTRACTS

be addressing at least a large part of the supply of services.The SPI places emphasis on the benefits of MoD/industry co-operation, which is the core strand of the Partnering Guide. So the scope of partnering must embrace equipment acquisition.Indeed the Partnering Guide does say as much (and promises further material on the subject). The Partnering Guide, although comprehensive, is also very broad in its sweep. It deals with the process of deciding to partner, attitude and behaviour issues, the documents of partnering and how the MoD/industry team should organise the management interface and control.It deals with subjects as diverse as change procedure, exit strategies and post project evaluation. It is a thoroughly worthy publication.It does however make one underlying assumption which is that having decided to partner, the partners then go the whole hog.You either partner or not partner – a binary choice. On the one hand this is quite right.The scale of the cultural shift that partnering demands is very considerable. For either party to go into it in a halfhearted way will almost certainly cause the intent to fail. On the other hand, it does take time for people to change their ways.The cultural shift will falter if there is little or no trust.Trust takes time to build. Certainly on old-fashioned equipment procurement,there is now almost two decades of definite ‘not partnering’.The good news is that SPI is largely designed for the major projects whose project lifetime can be 15-30 years.Thus the question might be postulated as to whether a transition to partnering might be possible rather than a simple switch over.This would allow the people some time to get used to a new way of doing things. The transition could be from ‘basic’ partnering to ‘advanced’ partnering. Illustrative examples of the differences,together with a now old-fashioned eyes-on-hands-off comparator are shown in the following tables, (shown overleaf).

70

CONTRACTS

Partnering comparisons in MoD equipment projects – contract phase

1.1 Scope

Level

Subject

• Simple transaction

• Single contract

• Basic

Eyes-on-hands-off comparator

• Simple contract(s)

• Non-binding MoU+

• Co-operative working

• Single project

• Non-strategic

Basic partnering

• Business field duration

• Simple contract(s)

• Binding partnering agreement+

• Sharing long-term benefits

• Business field

• Strategic

Advanced partnering

1 Relationship

1.2 Purpose

• Simple contract

• Project duration

• Published standard+

1.3

• Contract duration

• Local understanding

How documented

Duration

• Not applicable

1.4

1.5 Governance

• Industry best practice

1.6

3:

SMARTER CHAPTER

71

CONTRACTS SMARTER 3: CHAPTER

Subject


Basic partnering

• Limited to matters of strict

Advanced partnering

• The accepted mode

formality only

• The accepted mode

• Top-to-bottom ensuring strong

relationships

• Free access to all data relating to

• Access at contractor’s works only

• As basic +

• Access allowed from remote sites

the project

• Prepared data only

some data

• Restricted/controlled access to

relationships

• Top-to-bottom ensuring strong

the contractual interface

• A degree of channelling through

(e.g. contract amendments) +

• Limited to matters of strict formality

• Prepared data only

• None

wrong

• Elevation only when things go

rate with the scale of the contract

• The minimum level commensu-

interface

• Used to by-pass the contractual

through contractual interface

• Most information channelled

Release of data

Access to computer held data

Level

Informal

Formal

2 Communication

2.1

2.2

2.3

2.4

2.5

• Raw data

72


2.6

Subject


• Some contact – all concerned

Basic partnering

• As basic

Advanced partnering

members do not have tribal

• Almost not an issue – IPT

• MoD strictly remote from

trust each other not to abuse direct contact

• As basic +

allegiances

• Co-operative

(e.g. NAPNOC)

• Limited exceptions

subcontractors

Subcontractors – MoD contact

3 People • Not relevant

• Behaviour charter

• Both sides risk averse

• Emphasis on judgement

• ‘Managed’ risk taking

• As basic

• As basic

Behaviour

• No-surprises

Risk aversion

• Emphasis on procedure

3.1

• Bad news suppressed

3.2 Decision making

• Proactive

• Behaviour workshops

3.3

• Positive

• High

• Defensive • Finger pointing • ‘Papering the file’ • None

• Limited

Culture

Co-location

3.4

3.5

73


3.6

Subject

Eyes-on-hands-off comparator • High

Basic partnering

• High

Advanced partnering

to eliminate/mitigate/manage

• MoD runs its IPT. The contractor

sary to help preserve contractual

• Eliminated

delivering both sides objectives

• The IPT takes responsibility for

• There is a single IPT structure

costs/benefits lie where they fall

• Some risks jointly owned and

• As basic +

• Taken as read

• Little • Irrelevant (rely on the contract)

• Contractor carries all risk

• Not necessary

runs IPTs. The two touch for the purposes of good communi-

cations and co-operation but this is strictly without prejudice to the division of contractual responsibilities

rights

• Less used, but seen as necesessential to stop the contractor

• Highly developed – seen as

• Risks allocated to party best able

Trust

Man-for-man marking

IPT methods

Risk

4 Project management 4.1

4.2

4.3

‘cheating’

74


Subject


Basic partnering

• More complex TCIF linking PCT

Advanced partnering

• On cost only

• On PCT

to all available information

• No restrictions. Access granted

drives up efficiency etc

• Proactive cost-down joint IPT

and rolling milestones

• Mixture of progress payments

provided on a regular basis

• Actual and forecast costs

scheme

• As it falls out from the TCIF

a rolling annual basis

• Milestones which are agreed on

• Tailored to nature of work

• TCIF or similar preferred

• Not applicable (unless SC43/48

• None

defined at outset of contract

provided all milestones are

• On completion or on milestones

incentive)

• None (the firm price is the

• Usually firm price

‘Open book’

Gain/pain sharing

Payment

Incentives

Pricing

5 Financial

5.1

5.2

5.3

5.4

5.5

applies)

75

CHAPTER

3:

SMARTER

CONTRACTS

These tables are designed to assist the parties in formulating the extent of their partnering commitment. Such a set of tables could be worked out for individual projects.The simple act of discussing these points will help to focus attention on the practical steps that need to be taken in moving from the old regime to the new.The other advantage of this structured approach is that it will help prevent both sides from trying to pick only the bits each like from a partnering environment. For example, companies will agree to a far greater degree of access to information by the MoD provided the access is used for a positive purpose, such as early problem solving. If the MoD wants such access but intends it only for a negative purpose, such as suspending contract payments, then the result is not partnering.The MoD would only have picked the bit it wants (access to information) without the balancing obligation (only to use it for positive purposes). Similarly if companies want to form joint integrated project teams with the MoD, they must not try to lay the blame with the MoD if matters go awry. In each case the benefit of partnering has a potential down side. Both sides must be willing to risk the down sides in return for the benefits.

76

Contract incentives THE SEARCH FOR INCENTIVES P R I N C I P L E S O F TA R G E T C O S T I N C E N T I V E F E E C O N T R A C T S ( T C I F ) WHY DO IT? SMART TCIF FIRM PRICE INCENTIVE PERFORMANCE (FPIP)

chapter

4

Chapter 4: Contract incentives

The search for incentives At its simplest,the phrase contract incentives may mean nothing more than bonuses for achieving some key aspiration, such as delivery earlier than scheduled. Such schemes can operate on MoD contracts but are not widely used. More recently, sentiments are expressed along the lines of ‘a commitment to continuous improvement with gains being shared’ but there is relatively little material on turning sentiment into hard, contractual forms.As already seen, SPI encourages the use of incentives,but the specifics seem to be limited to varying the size of any payment retention according to the success with which the work unfolds.Whilst important in their own right, such ideas do not go to the heart of the contract.What is needed is a form of contract construction which of itself provides the essential cornerstone of incentivisation.The search for such a form starts with the Target Cost Incentive Fee (TCIF) contract.

Principles of Target Cost Incentive Fee contracts (TCIF) The principle of the TCIF contract is very simple to state.The MoD and the contractor negotiate and agree a target cost for the contract before the work commences and agree to share, in prescribed proportions, any variance (up or down) between the target cost and the eventual actual costs which are ascertained after the work is finished. If the costs exactly equal the target, the contractor is paid those costs plus a pre-determined fee by way of profit.If the ascertained costs are at variance from the target cost then the contractor is paid the actual costs but the amount of fee is increased or decreased respectively according to the pre-agreed contractor share of underspends or overspends against the target. Seen from the contractor’s viewpoint,his profit (amount and percentage) improves as costs fall. Seen from the MoD’s viewpoint,the final bill falls as the contractor’s cost performance improves. In each case the converse is also true.These points are illustrated in Figure 19 (see over).

78

CHAPTER

CONTRACT

INCENTIVES

0/1

Fee

4:

00

/4

0

Target fee

60

85/

15

0/1 00

Target cost

Cost

Figure 19:TCIF contracts In these figures the share ratios (e.g. 60/40) shown on the lines are the respective shares (MoD first) of underspends and overspends.For comparison purposes the dotted line shows the sharing scheme in a TCIF scheme and the solid line shows the non-sharing profit line in a firm price.The question of share ratios and the ‘shape’ of the curve at the extremities will be addressed shortly.

Why do it? The question arises:Why on earth would the contractor wish to share cost savings, which he earns and which under a firm price scheme would all be his to keep, with the MoD? Similarly:Why on earth would the MoD be willing to sign up to a scheme that allows the price to vary and in which the final bill is not known until after the contract is finished? The answer to both questions is in two parts.The first part is a matter of history. The second, as luck would have it, goes right to the heart of Smart Procurement. The two are linked by the experience of industry and the MoD on major projects in the fifteen years preceding the arrival of Smart Procurement. The historic issue stretches back to the era in which all major projects involved an extensive period of research and development undertaken by the contractor selected by MoD and using 100% MoD funding. Such R&D phases were considered to be suited only by a ‘cost-plus’contracting arrangement in which the contractor

79

CHAPTER

4:

CONTRACT

INCENTIVES

was guaranteed to recover all his costs plus a fixed percentage for profit.Because the recovery of all costs was guaranteed the contractor was not considered to be at any commercial risk and thus he was only rewarded by the ‘non-risk’ rate of profit allowed under the Government Profit Formula. For most firms this amounted to a few percentage points of profit only.This was perhaps quite equitable given that cost recovery was guaranteed regardless of the efficiency with which the work was performed.For a number of years the MoD operated a scheme whereby additional points of profit could be added (but never subtracted) depending upon efficiency,but the scheme fell into disrepute – as awards tended always to be ‘average’ – and was dropped.To make matters worse, it was accepted that the cost of the work could not, by definition, be estimated at all and the usual arrangement was for work to start against an initial financial limit (referred to, somewhat inappropriately, as the limit of liability) which would be increased from time to time as the work unfolded.With no incentive (it was later argued) for industry to keep costs down and little ability to proactively manage expenditure by the MoD, the recipe was made for the less desirable features of the now infamous cost-plus era. The contrast with a firm price arrangement is thus dramatically seen:

Profit

Fi

rm

Pl

st

Pr

Co

us

ic

e

Cost

Figure 20:A firm price arrangement In summary, industry disliked the cost-plus era because of its low profit rates, and the MoD disliked the cost-plus era because of the absence of genuine incentives on the contractor to control costs. By the mid-seventies,TCIF contracting had been developed and the technique solved both problems. For the contractor potential profit rates were improved both in terms of the target fee (which tended to be set at the higher ‘risk rate’ of

80

CHAPTER

4:

CONTRACT

INCENTIVES

profit under the Government Profit Formula) and by the prospect of sharing in savings if costs could be kept below the target cost. For the MoD the creation of a real incentive on the contractor to control costs was the prize.Even with a ‘shallow slope’ on the overrun side, overspend would mean the unthinkable for the contractor, a hit on profits! Indeed care was (and is) needed in the construction of a TCIF contract to ensure that the possible damage to anticipated profit could not be construed as a penalty, which would of course be unenforceable. However, the connection between profit and performance is only one way of looking at TCIF contracts.The other way leads nicely to the second reason that MoD and industry found it convenient to adopt TCIF contracting in the 1970s and early 1980s.To aid in understanding, let it be assumed that the two sides to a particular contract would agree not only a target cost but would agree also the range of costs within which the costs were likely to fall. Performance would be incentivised over this range: Fee

60

/4

0

85/

Most optimistic cost

Target cost

15

Most pessimistic cost

Cost

Cost incentive range

Figure 21: Cost incentive range In this illustration, one can consider the question as to the distribution of costs between the parties as well as the distribution of savings. For example, for every £1M saved beneath the target, the contractor makes an extra £400K profit and the MoD gets to keep £600K.At £1M above the target cost the MoD gets to pay an extra £850K and the contractor must contribute £150K to the cost of completing

81

CHAPTER

4:

CONTRACT

INCENTIVES

the work.Thus it becomes obvious that the spending or saving of every single pound is a matter of great importance to both parties.The essential characteristic of TCIF contracting then emerges.The MoD and Contractor – Customer and Supplier – must co-operate for their mutual benefit.A strong, positive relationship is essential to success. To summarise, the history of cost-plus contracts leads to the need for a scheme which will improve profit rates as costs fall.A scheme is found (TCIF contracting) which will produce this result but it depends upon a sound relationship. What then of TCIF contracts and Smart Procurement? Sadly, we cannot leap from one to the other without a further historical foray.This time from the mid-1980s to the mid-1990s. In this period TCIF contracts fell into disuse as the white heat of the Levene reforms began to bite.The zealous use of international competition together with a growing lack of confidence in the non-competitive pricing regime introduced the vigorous use of firm price contracts (using the NAPNOC regime where competition could not be applied).Thus industry’s wish of higher potential profit rates (as compared with the earlier cost-plus era) was arguably maintained but the need for good relationships was severely diminished.This, it was argued,mattered little because the nature of the contracts gave the contractor all the risk as well as all the reward opportunity.The Contractor had the freedom (and the liability) to fully perform the contract.The MoD was ‘eyes-on-hands-off’! Unfortunately, it is the case that major defence projects do not succeed if one side or the other has all the risk. Sharing of risk is appropriate. So too is sharing of information, experience, ideas and solutions to problems.This period of time proved by not having it, that co-operation remains essential to success. In parallel with, and in support of, early MoD/CBI discussions about partnering in the mid-1990s addressed the desirability of re-energising the use of TCIF contracting. At the time of writing, re-introduction of TCIF contracts has been slow and patchy. It is the Author’s contention that this is due not only to a lack of experience on both sides but that industry, whilst pressing for better relationships with the MoD, had become used to the ‘0/100’ incentive of a firm price contract and was disinclined to share profits even for the sake of better relationships.The twin imperative – improved profit rate potential and better relationships – of the early 1970s had given way to arguments about relationships only. The Author further contends therefore that discussion of TCIF contracting in Smart Procurement will concentrate on the concepts, principles and procedures that will promote co-operation.The monetary sharing arrangement will be a natural, if high profile,feature of the scheme but the ways to make the co-operation really work in practice will be the centre of attention.The Smart Procurement Initiative has created the environment for this to happen.

82

CHAPTER

4:

CONTRACT

INCENTIVES

Smart TCIF Before proposing an approach to Smart TCIF it is necessary to postulate one more question about the purpose of TCIF contracts and to cover one more principle regarding the MoD’s traditional use of such schemes. One purpose of TCIF contracts is to link profit to performance.It places an incentive on the contractor (hopefully working in co-operation with the MoD) to keep costs down, it being assumed that there is a wide range within which the cost of meeting the contract specification may fall.That is to say that it is accepted that the specification is firm and precise, but the cost of meeting the specification is inherently uncertain.This is a vital point to which the text will return. The other principle is to do with the MoD’s wish to apply a maximum price to a TCIF contract.A maximum price is an absolute limit on the amount the MoD will pay (excluding ‘changes’,discussion of which is outside the scope of this Report) leaving the contractor with an unlimited liability to spend to complete the work. A limited liability against an unlimited liability – hardly a balanced equation for a partnering based relationship: Fee

60

/4

0

TF

85/

15

0/1 00

Most optimistic cost

Target cost

Most pessimistic cost

Cost

Cost incentive range

Figure 22: A partnering based relationships The conventional MoD use of a maximum price in a TCIF contract draws some interesting points. Firstly, the limited v unlimited liability inequity. Secondly, the

83

CHAPTER

4:

CONTRACT

INCENTIVES

MoD would insist that the maximum price be within its budget for the contract. This means that it is budgeting for costs not expected to be incurred,more provocatively budgeting for contingency,not capability.Thirdly,it is arguably the case that having budgeted for the maximum price,with the contractor picking up all costs in excess of the maximum, the MoD has little real interest in helping drive costs down particularly if, as has been normal, any MoD savings are delivered back to the Exchequer and not retained for other use within the MoD.Fourthly,the MoD argues that a maximum price is balanced by the absence of a cap on profit rate. This is a weak argument because it is always conceivable that the project could cost double the target, but could never be completed at zero cost! Logically the diagram is always skewed to the right. Theoretically, a TCIF scheme for genuine risk sharing partners would be of the following nature: Fee

50 TF

/50

TC

Cost

Figure 23: A theoretical TCIF scheme However, it is probably unrealistic to expect that the MoD will dispense with maximum prices and it is inappropriate to expect contractors to agree equal underrun and over-run share ratios (the above diagrams are not to scale) since the target fee is only a fraction of the target cost. Returning to the question of the specification, a conventional TCIF contract presupposes a firm,precise specification.In this respect TCIF schemes and firm price contracts are identical and therefore suffer the same two drawbacks.Firstly,agreement of the specification takes a long time,delaying contract award and delaying

84

CHAPTER

4:

CONTRACT

INCENTIVES

equipment in-service dates.This is one problem strand which Smart Procurement aims to solve. Secondly, in major, complex defence projects the too early agreement of a firm, precise specification rarely suits either side. In theory the MoD knows precisely what it will get and the contractor knows exactly what he has to do.In practice the MoD does not want what it has specified and the contractor ends up doing things different to his expectations.This conflict is exacerbated by a firm price contract or by a TCIF contract with a single point target cost. In both cases, battle ensues with the MoD side trying to interpret the specification to maximise the delivered capability and the contractor trying to interpret the specification to minimise costs.What chance of co-operation is there now? A Smart TCIF scheme needs to resolve the conflicts brought about by the use of maximum prices. It needs to allow flexibility in the specification of the work so that the scheme can recognise that both specification and cost possess measures of uncertainty. If these problems can be solved then we have a scheme which intimately links technical and commercial dimensions.We will have a scheme that promotes close co-operation during contract negotiations and links that co-operation to the co-operation needed to successfully execute the contract. One such scheme is illustrated as follows: Fee

50 /5 0 Flexibility Zone

TF

100/0

80

Target cost range

/20

Maximum price

Cost

Budget

Figure 24: A 100/0 plateau

Such a scheme is founded upon a composite set of principles.The principles revolve around the idea of a 100/0 plateau (again, the diagram is not to scale, the plateau

85

CHAPTER

4:

CONTRACT

INCENTIVES

must only be of an appropriate size).The plateau represents a ‘specification flexibility’ zone.The principles are: 1.

The contract specification is written in a manner that positively intends interpretation as the work unfolds.This shortens time to contract award and, in conjunction with the second principle, significantly reduces conflict during contract performance.The specification may be written initially at a cardinal points level,but not at the level of a highly detailed technical or performance specification. The contract specification is genuinely intended to evolve as the work proceeds so that it keeps pace with evolving user understanding of how the new equipment or system will be used and it keeps pace with evolving technical understanding of what can usefully and economically be achieved in the time available.

2.

The ‘deal’ between contractor and the MoD is that as the work unfolds the contractor will normally agree to the MoD’s interpretation of the specification, without argument if the interpretation makes sense, provided that the MoD works actively with the contractor to ensure that costs are always on or below the plateau with every effort made in driving ‘to the left’.

3.

The parties must have 90% confidence that costs will fall in the plateau range. However, the presence of the plateau means that initial cost estimating need be less detailed, which contributes to reducing time to contract award. The MoD can be reassured that in accepting less detailed estimates, the contractor has no motive to mislead the MoD because, in the plateau range, 100% of costs estimated but not spent are credits to the MoD.

4.

The MoD savings are retained by the project to expend on increased capability if the Customer has approved enhancements which he desires. Savings are not delivered to the Exchequer. This provides additional motivation to save money both for the project Customer and for the contractor who may be awarded additional work.

5.

If circumstances dictate, it is perfectly acceptable for the MoD budget to be towards the right hand end of the plateau i.e.even if the maximum price is higher. This makes sense not only because the MoD is budgeting only for the most likely outcome,but also because if the budget coincides roughly with the point at which the contractor’s anticipated profit would dip there is a double and mutual ‘barrier’ across which neither side will wish to tread.If the MoD allows contract costs to exceed the contract budget there will be pain (the overspend will have to be offset by savings measured against the equipment programme elsewhere)

86

CHAPTER

4:

CONTRACT

INCENTIVES

and opprobrium for the Crown Servants for poor financial management. For the Contractor and his staff,needless to say,it is unthinkable to allow contract costs to start hitting the bottom line. This composite set of principles provides an appropriate update to the TCIF principles as worked out in the mid-1970s. It introduces the means to positively allow for flexibility. It binds the parties together such that success depends upon cooperation.

Firm Price Incentive Performance (FPIP) In the search for a form of a contract that supports and promotes the aims of SPI,including its commitment to co-operation,it may be that TCIF is not the perfect form. Its principle feature is that the main incentive is in driving cost down for a defined specification.TCIF with a ‘plateau’ can be constructed to allow some flexibility on specification but in doing so its main purpose is to prevent settling on an over detailed specification at too early a stage.A conventional TCIF scheme can be embellished to include additional incentives on technical performance or timescale, but the primary driver remains on cost. It is perhaps time to reconsider the purpose of the contract, in the context of the so-called Performance, Cost and Time (PCT) envelope.Traditionally the contract specification is king, anything that exceeds it is an unnecessary expense and any underachievement is simply a failure.Thus the specification must first be fixed,then a time for delivery and finally a fair and reasonable price set. Negotiations would eventually fit the price to within the budget.The challenge for the contractor would then be to precisely meet the specification, on time and at the lowest cost. Thus of the Performance, Cost and Time parameters, the last to be fixed is cost. With shrinking defence budgets and with the emphasis on delivered capability (which is a looser feast) rather than equipment per se, it is arguably the case that cost should be fixed first (i.e. the budget), then time, with performance last.That is to say the emphasis should swing from delivery fixed performance at minimum cost to delivering the best performance for a fixed sum of money. A contract constructed on such a premise might be called Firm Price Incentive Performance (FPIP). Such a contract would be based on principles along the following lines: •

A basic (firm) price (which includes a set fee) fixed at the level of the budget.

•

A Total Cost Budget (TCB) being the basic price less the fee.

•

A commitment by the contractor to achieve a Minimum Guaranteed Performance (MGP).

87

CHAPTER

4:

CONTRACT

INCENTIVES

•

A Target level of Performance (TP) at which the contractor aims – this could be the SPI ‘stretch’ target.

•

All costs above the TCB are to the contractor’s account (he must achieve at least MGP) – to incentivise cost efficiency.

•

All savings against TCB are to the MoD’s account if nothing better than MGP is achieved – to incentivise the contractor to do better on performance.

•

A sharing of savings against TCB if performance is between MGP and TP.

There could be several different models based upon these principles,the underlying aim being to ensure that all of the contractors key business measures (for example sales volume, profit etc.) are maximised by achieving the best possible performance.

88

Summary and conclusion

chapter

5

Chapter 5: Summary and conclusion Smart Procurement is the single most exciting initiative for half a century or more in the acquisition of material for the armed forces.The nature of the work contracted to industry has been changing for a decade with an increasing proportion of extramural expenditure being spent on the acquisition of services to balance the long-standing equipment budget.Much of the services acquisition has been handled by the Quartermaster General (QMG), the Chief Naval Support (CNS) and the Air Member for Logistics (AML) – now combined into the DLO.These organisations have been less rule-book bound than the old Procurement Executive and in any event contracting for services is arguably much more amenable to partnering concepts than equipment acquisition. Nevertheless, the equipment programme remains and making it ‘Faster, Cheaper, Better’ on the very large projects is the Holy Grail for the MoD and industry alike. At the risk of being selective,the MoD’s own words (from the Smart Procurement booklet) are worthy of repeating: •

A better, more open relationship with industry based on partnering

•

More investment during early project phases

•

An empathy with the Customer

•

A desire to work co-operatively

•

A wish to challenge convention.

If these principles can truly be applied to major equipment or system acquisitions then genuine partnering (or ‘teamworking’ as current trends would have it) will operate bringing benefits to all concerned.The four key agencies (Customer 1, Customer 2, DPA and DLO) with their emphasis on delivering capability will be the driving force for change.Gladly,the final component for success – changing the people – is also in hand.The MoD has plans to introduce an ‘acquisition stream’ for civilian and military staff with the aim of developing staff to the standards of excellence necessary to make the SPI a real and sustainable success.The challenge for industry as a whole and for individual companies is to ensure alignment of their change programmes with MoD’s and to work with the MoD to find the contracting models which of themselves promote and underpin the new ways of working.

90

Understanding SMART Procurement in the MOD (Hawksmere Report)

Litigation Costs (Hawksmere Report)

Public Liability Insurance (Hawksmere Report)

European Lobbying Guide (Hawksmere Report)

Unlocking Shareholder Value (Hawksmere Report)

It's A Mod, Mod, Mod, Mod Murder

Selling Skills for Professionals (Hawksmere Report)

Employer's Liability and Industrial Diseases (Hawksmere Report)

Strategic Customer Planning, 2006 Update (Hawksmere Report)

Intellectual Property Protection and Enforcement (Hawksmere Report)

The Competition Act 1998, 2006 Update (Hawksmere Report)

Maximising Value on the Sale of a Business (Hawksmere Report)

Financial Techniques for Business Acquisitions and Disposals (Hawksmere Report)

Tax Aspects of Buying and Selling Companies (Hawksmere Report)

Procurement Strategies

Die Hard Mod

E-procurement

Practical Mod-Perl

Understanding Smart Sensors (Artech House Sensors Library)

Tax Planning Opportunities for Family Businesses in the New Regime (Hawksmere Report)

Public Procurement in the European Union

Die Hard Mod

Smart

Argument authority early mod england

MOD Colortable Revell Aqua Color

Literature favoritism early mod england

The Definitive Guide to Apache mod rewrite

Understanding SMART Procurement in the MOD (Hawksmere Report)

Litigation Costs (Hawksmere Report)

Public Liability Insurance (Hawksmere Report)

European Lobbying Guide (Hawksmere Report)

Unlocking Shareholder Value (Hawksmere Report)

It's A Mod, Mod, Mod, Mod Murder

Selling Skills for Professionals (Hawksmere Report)

Employer's Liability and Industrial Diseases (Hawksmere Report)

Strategic Customer Planning, 2006 Update (Hawksmere Report)

Intellectual Property Protection and Enforcement (Hawksmere Report)

The Competition Act 1998, 2006 Update (Hawksmere Report)

Maximising Value on the Sale of a Business (Hawksmere Report)

Financial Techniques for Business Acquisitions and Disposals (Hawksmere Report)

Tax Aspects of Buying and Selling Companies (Hawksmere Report)

Procurement Strategies

Die Hard Mod

E-procurement

Practical Mod-Perl

Understanding Smart Sensors (Artech House Sensors Library)

Tax Planning Opportunities for Family Businesses in the New Regime (Hawksmere Report)

Public Procurement in the European Union

Die Hard Mod

Smart

Argument authority early mod england

MOD Colortable Revell Aqua Color

Literature favoritism early mod england

The Definitive Guide to Apache mod rewrite

Recommend Documents