MoD CONTRACTS BULLETIN CONFERENCE
15 NOVEMBER 2000
Good morning ladies and gentlemen and welcome to the first MoD Contracts Bulletin Conference. My name is Stan Porter and I am Director General Commercial for the Ministry of Defence. Apart from my corporate role as the head of the Defence Commercial function, and with that responsibility for around 1,750 commercial staff across the MoD, I am also an Executive Director of the Defence Procurement Agency.
The theme of today’s Conference is “Selling to the Ministry of Defence” and during the course of the day you will be hearing presentations from a variety of speakers from the MoD and from industry, about some of the current initiatives in the defence acquisition process. I am also grateful to Business Information Publications Ltd, whom most of you will know as the publishers of the MoD Contracts Bulletin, for organizing this Conference.
I am going to speak today about some of the issues that are fundamental to successful acquisition and to touch upon the launch of Smart Acquisition, which you will be hearing about in more detail during the next presentation. I will also speak briefly about partnering, SMEs, Supplier Development and the Supply Chain, E-business and industrial restructuring. These are an important part of the continued drive to achieving the goals set out in the Strategic Defence Review (SDR).
Smart Procurement/Acquisition
Many of you should by now be familiar with Smart Procurement, which has been in operation for 18 months. As you will hear shortly from Peter Watkins, it has been renamed ‘Smart Acquisition’.
The last of the original 138 Integrated Project Teams (IPTs) was rolled out in May this year, bringing to an end the implementation chapter of this important initiative which had its origins in the Strategic Defence Review (SDR). The majority of organizational and process changes are now complete but, in many ways, the real job is only just beginning.
Perhaps it would be appropriate here to remind you of the major organisational changes which arose from the Strategic Defence Review (SDR) and Smart Procurement Implementation. The Defence Procurement Agency (DPA) was created from the former MoD Procurement Executive. The new-tri-Service Defence Logistics Organisation (DLO) was formed replacing the three PAOs: the Chief of Fleet Support, QMG and AMSO. And the central customer organisation has been rolled out and organised on a capability basis.
One of the main elements of Smart Procurement was the creation of a new acquisition cycle which covers six distinct phases - Concept, Assessment, Demonstration, Manufacture, In-Service and Disposal. Under the new Acquisition Cycle, DPA IPTs are responsible for a new requirement during the Concept, Assessment and Demonstration phases. Some or all of the Manufacturing phase. The IPT will transfer from the DPA to the DLO when the capability is delivered. An IPT will remain responsible for the project throughout its life, thus ensuring continuity and a joined-up approach between the DPA and the DLO.
We always knew that the hardest part of this significant change programme, like any other, would be changing people’s behaviour, or changing the culture. There is no doubt in my mind that this is already starting to happen. The examples I have seen and read about, of the benefits that many IPTs have already been able to secure, leave me confident that we have stepped off boldly in the right direction. But we can, and must, do more. It was clear at the outset that this was not some short term, quick fix of the procurement process. This is a fundamental and irreversible change in the way in which MoD obtains the equipment capability needed by our front line forces. There must be no going back. The initiative needs to sustain the momentum, and to drive home the changes to culture and behavior that will keep on delivering results – continuous improvement being the absolute watchword.
This is one of the reasons why Ministers have agreed to a series of measures to sustain the Smart Procurement Initiative under the name ‘Smart Acquisition’ – the initial phase has ended, but the business and the people must continue to be ‘Smart’. We also wanted to take the opportunity to build out from the theme of ‘procurement’ and to reflect and reinforce the whole life nature of the business. As you know, ‘acquisition’ encompasses everything from setting, managing and trading off requirements, through initial procurement and on to in-service support – just as the IPTs themselves, together with their customers, aim to do. We can finally start using the all embracing term of acquisition to emphasize the end to end, joined up processes we have put in place and are continuing to refine. In organisation terms, Smart Acquisition embraces the ECC, DPA, DLO and the Second Customer.
Continuing with the acquisition theme, one of the main thrusts on the people front is the setting up of the Acquisition Stream. This will provide all staff, military and civilian, involved in the through-life acquisition process with a common set of values, and develop them against the same set of competences.
Another important strand of Smart Acquisition is the so-called ‘Beacon’ programme. While it is very important that all IPTs pursue their performance, cost and time targets with vigour, a small number, either by their very nature, or where they sit in the acquisition cycle, offer the greatest potential to deliver substantial benefits for the Department. We are looking for these ‘beacons’ to lead the spread of good practice to other IPTs, and we have embarked on a pilot scheme to provide direct assistance to four of them – helping to transform their ideas into real benefits.
Partnering/Private
Finance Initiative (PFI)
A contract with which we are comfortable and which is likely to deliver value for money in the context of the tight performance, time and cost restraints is as much the objective in partnering and PFI as it is in the less complex contractual requirements. Peter Ryan will be talking to you in greater depth about Public/Private Partnerships later this morning.
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 need to ensure that the relationship between the buyer and supplier is open and encourages the positive benefits of partnering cannot be underestimated.
As with Smart Procurement, we look to industrial prime contractors to flow these benefits down the supply chain. The product or service is the result of the totality of the arrangements and the performance of the supply chain will often be the key to a prime’s success.
Many prime contractors will say that how they manage their sub-contractors is none of MoD’s business. However, in the long term arrangements under PFI and partnering, we do need to ensure that the contract will continue to offer value for money. We will therefore place the onus on primes to ensure that their sub-tier selection processes are fully visible to us. Some of these issues have been are difficult to assess in an objective way. We now have a new tool - the soft issues bid evaluation tool - SIBET to increase the level of objectivity in our assessment of these issues in tender evaluation. I am pleased to note the wider use to which the SIBET tool is being put and it is also encouraging to note the indications of support which industry is giving its use.
SMEs/
Supplier Development & Supply Chain/NPPO
Moving to an industry perspective, I imagine many of you here today will be from SMEs. The MOD along with other Government departments recognise the important role which small businesses play within the economy and some of you will be aware of the range of measures that the DTI are taking forward to ensure that small businesses are not disadvantaged purely because they are small. SMEs are important to us and MoD is firmly committed to providing the right conditions to stimulate and sustain their competitiveness.
Current MoD procurement policy is that procurement staff should not view small firms as a special case, but consider them in the same way as they would any other business when tendering for goods and services and, in this respect, it aligns itself with the message in the DTI video/booklet package ‘Think Big, Buy Small’ which some of you may have seen.
While our general approach to procurement is to deal with prime contractors, we seek to ensure that this is not to the disadvantage of SMEs. As part of the Smart Procurement initiatives, we aim to ensure that SMEs have appropriate access to, and benefit from, our new ways of working. The measures we have in place include a new supply chain code of practice, which when fully developed, will deal with the relationship between MoD and its suppliers, and MoD’s suppliers and their supply chain. In the latter context, there will be an additional code for those circumstances where a vertically grouped prime runs a competition between an in-house facility and external bidders. Not surprisingly, the SMEs are particularly keen on that code. The codes are in negotiation with an industry team, which includes SME representation.
SMEs will continue to represent an important part of the supply chain and they will have the opportunity to become sub-contractors to the major suppliers.
Alastair Parker will be speaking to you later this morning about Supplier Development and the work which the Defence Logistics Organisation, in particular, is undertaking in this field. Supplier Development is a major issue for both the Defence Procurement Agency and the Defence Logistics Organisation and we intend to be joined-up in our thinking. Both businesses will have their own specific requirements from strategic agreements with the major suppliers, but will be working with the same main players and intend to present a consistent position to our industry contacts. Both the DPA and the DLO are seeking excellence from their suppliers and a joint commitment to improve performance and capture the benefits from closer and more open working practices.
In the Defence Logistics Organisation, The Non-Project Procurement Organisation (NPPO), which you will hear about in more detail this afternoon, is planning to concentrate procurement of tri-Service General Stores on some 25-30 commercial partners who will be known as Industrial Prime Vendors (IPVs). Although the NPPO initiative may lead to fewer direct opportunities to contract with MoD for these particular stores, the volume of business available remains the same and we hope that SMEs will market their capabilities to those companies bidding to become IPVs. They have a major role in introducing modern supply management techniques and processes into the supply chain. We hope SMEs will work positively with the IPVs to deliver the best service to the MoD customer.
E -Business
One of the ways in which we are working with industry to reduce costs, and a prerequisite to achieving “better, faster, cheaper” goals of Smart Acquisition is in adopting new technology in procurement activities and project management.
We need to harness the benefits to improve both our acquisition processes and the manner in which we engage our suppliers. The Government is keen to see the adoption of e-commerce by departments driven forward and has therefore set a number of targets. The headlines are that by the end of 2001 90% of low value goods should be purchased electronically and 50% of tenders should be sent and received electronically. These targets were set with civil procurement in mind but we will not allow the defence procurement business to stand aside, and we are currently reviewing the targets to which we shall commit ourselves.
Some of you may have seen evidence of the ASPECT contract management tools package. Under ASPECT, MoD is moving towards standardising the format of Invitations to Tender (ITTs) and contracts. This has begun to be rolled out in the Defence Procurement Agency and the Defence Logistics Organisation is actively planning to implement this important tool. When fully deployed it will be a considerable enhancement to the work of commercial staff.
Another example of the way in which the MoD is progressing is in the introduction of the Government Procurement card for purchasing ad hoc items which, until the rollout were previously carried out through local purchase procedures. These cards have required a real change in culture and it is very encouraging that the rollout has proceeded so smoothly. By issuing the cards as close as possible to the point of consumption, empowering individuals and stripping away red tape, we are saving roughly half the former processing costs. Approximately 900 cards have already been issued, and we expect that up to 80% of local purchase will eventually be done by GPC, equating to about £50M-£60M a year of business.
A further example of our commitment to E-Business is the launch of the Defence Electronic Commerce Service or DECS. In July, MoD let a contract with Cap Gemini Ernst and Young for the creation of this service. DECS will provide a single common interface with industry, using existing technology. It has the flexibility to match technologies used by individual contractors. Development of the capability of the service will be incremental, building on our legacy systems. Initially it will provide a basic messaging and translation capability. Later, the service will support electronic ordering, receipt and payment. There are also plans too provide a facility for electronic tendering and contract placement. When allied to the ASPECT tool set, these capabilities will enable the whole purchasing process, from the initiation of the requirement to receipt and payment to be carried out electronically.
It is vital that we improve communications and provide for ready access to information. This is yet another area where electronic technologies can enhance both commercial and project management activities and we are working to do so through shared data environments. This can support and, in some instances enable, joint working with our suppliers. Sharing data between MoD and industry, like many other aspects of electronic business, requires a significant culture change. In this context the “need to know” principle should be re-interpreted as “need to share”. However, it is important that such information sharing is secure and that commercial sensitivities, particularly in respect of intellectual property, are respected. The Department is in dialogue with the CBI to reach agreement on the commercial principles to underpin the sharing of data. This way of working will lead to increasing confidence on both sides and facilitate the earliest introduction of Shared Data Environments.
This is a sizeable electronic agenda, which Simon Lydiard will talk about in greater detail this afternoon. MoD is in the vanguard across Whitehall in pushing back the boundaries on e-commerce. Inevitably we will rub up against some of the trickier issues before there is settled policy and experience. With so many initiatives, for e-commerce to work as effectively as it can, it requires the commitment and engagement of us all.
Competition
Policy
Turning now to the interface between the Department and Industry, in which we are all involved, the radical review of our procurement processes has sought to streamline the ways in which we do business. We have not, however, promoted change for change’s sake, and where our policies were - and are- working, we continue to champion them.
Our policy on competition is a prime example. Competition is still the most effective means of securing value for money, and it remains the cornerstone of our acquisition policy for supplier selection at the prime and sub contract level. It should be seen as complementary to other procurement methods such as Public Private Partnership initiatives, under which our partners will continue to be selected by competition. Where we decide to proceed without competition, MoD will agree contract terms including price at the outset. This approach is reflected in our NAPNOC policy.
Statistics
To give you an idea of the breadth of its purchasing, on average over the last three years MoD has placed over 70,000 contracts and amendments valued at some £8.75 Billion per annum. Of these over 70% by value have been placed as a result of competitive tendering, and over 90% by number of those commitments are valued at £100K or less. This still leaves some £2.5 Billion worth of business a year which is placed non-competitively. Overall, some 6% by value is purchased offshore
MOD has over 37,000 suppliers. In many ways, that is far too many and other private sector companies have sought to rationalise their supplier base. I have described the approach we are taking in the NPPO and throughout our business, many opportunities will remain at the second, third and lower tier levels. We will continue to seek the right balance between providing opportunities to new suppliers and right sizing our supplier base.
MoD Contracts Bulletin
The MoD Contracts Bulletin, which is managed by the Defence Suppliers Service and published by Business Information Publications Ltd under their contract with the MoD, was first created as a vehicle for improving awareness among potential sub-contractors of defence contracts. The NPPO will be advertising their forthcoming competitions in the Bulletin and elsewhere and potential IPVs and/or their prospective partners in the supply chain should study future issues for details of the opportunities that will arise.
The Bulletin is a useful means of increasing visibility of MoD’s requirements, enhancing its supplier base, both at prime and sub-contract level and alerting potential prime and sub-contractors of forthcoming opportunities. While the larger companies may view it primarily as potential prime contractors, SMEs find it particularly useful in identifying sub-contract opportunities. The Defence Suppliers Service presentation this afternoon will be focusing on the corporate role it undertakes within MoD as a focal point to handle enquiries from companies interested in becoming suppliers to the MoD and the role which the Bulletin plays in this. Subscribers to the MoD Contracts Bulletin can receive it in a number of ways from the publisher, Business Information Publications Ltd, according to their individual preferences. As an alternative to receiving printed paper versions or by DataDisk, subscribers can also receive the Bulletin electronically either by e-mail or through Business Information Publications Ltd’s internet service, which is accessible 24 hours a day. Of the current 3,638 Bulletin subscribers, around 16% (567) receive it electronically.
I think it important to take a few moments to consider a major influence affecting the environment in which we all conduct our business – that of defence industrial consolidation.
Whilst it is primarily for industry to decide what organization is required for commercial success, as UK manufacturing industry’s biggest single customer, MoD is not an entirely disinterested customer! Although Governments should not prescribe the form of new companies, alliances and joint ventures that emerge from this process, they have apart to play. Certainly, Govermments have a role to play in creating the right environment in which the process can take place. In doing so we must take account of the industrial drivers for consolidation. While the defence industry has its own imperatives and objectives, not all of which will necessarily dovetail with those held by the MoD, it is clearly in the interests of MoD that the firms supplying it should be competitive on a global scale.
The need for increased competitiveness and efficiency in a more demanding defence market has been a key driver behind the process of industrial consolidation, both within Europe and across the Atlantic.
We have already seen significant developments with the formation of EADS, and of BAE SYSTEMS and the consolidation of Thomson-CSF into a third European prime contractor, as well as the creation of the US super primes. These new European companies emerging from the consolidation process are big in two significant respects – big enough to be competitive with their US counterparts in terms of technology and finance – and big enough to allow them to form partnerships on an equal basis with their US counterparts.
There is one other crucial influence which is at play here – for as well as ‘consolidation’ of what has traditionally been termed the ‘Defence Industry’, we now also have ‘globalisation’ of industry itself. Companies not previously regarded as suppliers to defence ministries have now become players as the application of civil technology acquires increasing importance and supply chains span the globe. But we, in the MoD, have to be aware that the effects of ‘globalisation’ on defence industrial consolidation carries risks as well as rewards.
I should like to close with a final acknowledgment of the ties which bind us.
Education and experience is a vital component of Smart Acquisition, which cannot be enabled solely by training. I hope that opportunities will be made available for staff exchanges between MoD and industry, so that we can benefit fully from each other’s experience.
I regret that I am unable to stay with you for the whole day, but I have asked those members of my team who are here today to let me have a report on the rest of the proceedings.
I will now hand you over to ........... .