Recently an independent review of the processes by which the United Kingdom’s Ministry of Defense (MoD) acquires military equipment was published. The review, headed by Bernard Gray, spanned a year, and addressed two main issues: (1) the need to align acquisition planning with resource availability, and (2) the need to improve acquisition planning, management, and delivery. The 297-page report was “welcomed” by the MoD, according to this article at www.defense-aerospace.com.

 

There have been dozens, if not scores, of similar reports on the US Defense acquisition system. Some have been commissioned by Congress, others by the Pentagon, and still others by the President. Many of them have identified problems and recommended appropriate solutions. Yet the problems remain. A couple of years ago, the US Government Accountability Office (GAO) noted that cost overruns and schedule delays on the largest DOD development programs had stayed within the same band over the past 40 years—regardless of which party controlled Congress, regardless of who was President, and regardless of which acquisition reform initiative was in vogue. So it is with some cynicism that we reviewed Mr. Gray’s report on what might be done in the UK.

 

As the report states, “The overall picture may be familiar, but it does not look pretty. On average, these programmes cost 40% more than they were originally expected to, and are delivered 80% later than first estimates predicted. In sum, this could be expected to add up to a cost overrun of approximately £35bn, and an average overrun of nearly 5 years.”

 

Here are some of the report’s key findings:

 

• “… the Ministry of Defence has a substantially overheated equipment programme, with too many types of equipment being ordered for too large a range of tasks at too high a specification. This programme is unaffordable on any likely projection of future budgets.” The situation originates from competition by the individual military services for scarce procurement dollars, which creates a “systematic incentive to underestimate” program costs, and is exacerbated by the MoD’s reluctance to terminate programs experiencing cost-overruns. As Mr. Gray notes, “Unfortunately the current system is not able to flush out at an early stage the real costs of this equipment, nor does it make effective prioritisation or rationalisation decisions.”
• Much like the process in the USA, the UK’s acquisition budget is “dominated by a ‘bottom up’ aggregation process, which makes it hard for ‘top down’ strategic guidance to control the balance of investment. Effective forums do not currently exist to allow top down guidance to control the evolution of the equipment programme. With each force bidding for the highest specification product as a result of the system incentives, there is insufficient clarity over which systems need to be the most technologically advanced, and which could be used sensibly with an ‘80% solution’ that would field a certain capability that could be grown over time. As well as increasing risk by encouraging great technical leaps, it also militates against making products exportable, since the most sophisticated products may not be affordable in many markets.”

 

As the result of the foregoing issues, Mr. Gray reports that –

 

These forces and incentives create an over-large equipment programme, which contains within it a significant underestimate of the likely out-turn, making the programme even less affordable than it appears at any given moment in time. When this over-large and inflating programme meets the hard cash planning totals that the MoD can spend each year, the Department is left with no choice but to slow down its rate of spend on programmes across the board. The result is that programmes take significantly longer than originally estimated, because the Department cannot afford to build them at the originally planned rate. They also cost more than they would otherwise, because the overhead and working capital costs of keeping teams within industry and the MoD working on programmes for a much longer period soaks up additional cash. The MoD also has to bear significant costs in running on old equipment because the new equipment is not yet ready for service. … As well as costing significant sums, this squeeze on short-term cash expenditure in an effort to manage an over large programme has a number of other undesirable impacts. It reduces funds available for technology demonstration or risk-reduction activities, which might reduce risk in new procurements. It depresses spend in areas such as Research & Technology, where by their nature, budgets tend to be committed less far ahead, and so are vulnerable to a cash squeeze.

 

One of the report’s recommendations might be worth considering for adoption by U.S. policymakers. Among the various recommendations was the following:

 

• “… to give the MoD some chance of success … the MoD’s budgeting should be moved from the current short-term cycles to a 10-year rolling budget. The deal across government should be that the MoD’s programme should be brought into a genuine and transparent long-term balance, reported to Parliament and externally audited, and in return the MoD should be funded on a long-term basis that allows it to manage effectively. Parenthetically, the Review Team would also assert that this move to longterm budget control should also be used to reduce the excessive accuracy of in-year cash targets. The MoD, in trying to manage multi-billion pound, decade long programmes, is also required to hit short-term cash targets that would be considered impossibly precise in capital intensive industries in the private sector. Whilst the MoD is skilled at it, this targeting produces damaging programme management impacts and is extremely wasteful, both in terms of economic use of the available budget and processing/management effort, over the medium term.”

 

See the report here.

 

Just like in the U.S., the UK also has its industry groups, which work “to promote the interests of the defence sector and raise wider awareness of defence industrial issues.” A separate article on www.defense-aerospace.com reported that the UK Defence Industries Council “welcomes the publication of the report and the Government statements, and is strongly behind initiatives to reform defence procurement.” It has issued its own reports, which can be found here.

 

It seems that the USA is not alone in seeing an urgent need to reform the aerospace/defense acquisition system. The UK MoD faces similar problems and has received several recommendations to address them. Just as in the U.S., true reform will require a fundamental shift in how the legislative branch (i.e., Parliament) authorizes funds to the Defense Department (i.e., MoD). In the U.S., though, such heresy has not been well received. Perhaps the UK will undertake the difficult yet necessary reforms, and will reap commensurate benefits. We wish them the best of luck.