Main Image Credit The Ministry of Defence had been used to a periodic review process. Courtesy of MoD/Harland Quarrington/OGL v.1.0
In the first in a series of articles, we explore the UK’s current attempt to operate a government-wide direction in its approval of major procurement projects.
Few governments find defence acquisition easy, especially when they seek to develop their own systems, instead of buying things that are already in production, and usually in another country. As a consequence, the UK and US governments, in particular, for decades have tinkered with, ‘reformed’ or ‘transformed’ organisations and processes for specifying and prioritising requirements, setting procurement strategies and arranging the in-service support for things bought.
Since the 1998 Smart Procurement Initiative (designed by McKinsey) the Ministry of Defence (MoD) has used its own acquisition cycle, involving a two-stage approval process (Initial Gate (IG) and Main Gate (MG)) for projects. However, on 20 April this year, the MoD officially adopted the Treasury-directed government-wide system for the launch and development of projects.
This sets up three approval points involving a Strategic Outline Case (SOC), the Outline Business Case (OBC) and the Full Business Case (FBC), the latter being the immediate prelude to the signature of a (sizeable) contract or long-term commitment. For the MoD, the SOC is novel and the other two require somewhat revised information sets compared with the earlier IG and MG system. The three stages of business case are meant to yield a greater volume and precision of accuracy of information as a project advances, leaving the government with confidence at the point it signs a major contract.
Each of these specified levels of business cases must address five dimensions in increasing depth: the strategic (the broader case for change, how it supports policy direction and reference to the consequences of staying with the status quo), the economic (which includes social considerations), the commercial (how the project is to be acquired), the financial (addressing affordability) and the managerial (how the project will be managed by the sponsoring organisation). The Treasury direction asserts that, under the strategic heading, objectives should be specified for the project that are SMART (Specific, Measurable, Achievable, Relevant and Time constrained) and be related to the broader strategy and direction of the wider organisation.
Treasury and MoD Guidance Compared
The hierarchy of direction as to how to operate the new system comprises the Treasury Green Book and Guide to Developing the Project Business Case. Below them lie the materials found in the MoD’s own JSP 655: Defence Investment Approvals.
An examination of the two document sets exposes some contrasts.
MoD Stress on Capability and a Programme Rather than Just a Project
The Treasury guidance is focused on a project, while the MoD often needs to be thinking in programme terms, a programme being a collection of related projects. Treasury guidance includes reference to assessment of the ‘constraints’ and ‘dependencies’ of a project (‘specify any dependencies outside the scope of the project upon which the ultimate success of the project is dependent’), whereas the MoD has to provide for the Defence Lines of Development (DLoDs) that are needed for usable capability to be available.
The established DLoD structure has eight core elements: training, equipment, people, infrastructure, doctrine, organisation, information and logistics. The MoD’s guidance on implementing the new business case system (which is publicly available on the MoD’s Defence Gateway/Knowledge in Defence site but requires a simple registration process) places its stress on addressing all the elements of capability from the first stage of a project: ‘The SOC will provide a programme perspective of capability outlining pan-DLOD dependencies from the outset’ and ‘The Enabling Organisations responsible for delivering elements of the solution should be consulted and have the opportunity to endorse any assumptions being made about deliverability’. In defence, ‘equipment’ projects can often be associated with further projects, most frequently with infrastructure. This stress on early consideration of the DLoDs should be recognised as a continuation of the trend from the beginning of this century to giving them more emphasis and attention.
A further complication for defence is that in a growing number of areas the government has the aspiration to maintain and develop national industrial capabilities and can only do that by providing particular sectors with a ‘programme’ of projects to keep businesses viable and their workforces busy. In 2020, the MoD is refining and perhaps defining its overall defence industrial strategy, but in place are strategic commitments to sectors relating to the nuclear submarines and warheads, as well as combat air, complex weapons and warships.
Few other governmental sectors have to assess projects on the basis of their consequences for the suppliers as well as the users. As Lucie Béraud-Sudreau argued in her study of French arms exports, the value of national defence industrial capabilities is in itself multi-dimensional, with implications for national freedom of military action, assurance of supply, tax revenues, employment and prosperity, opportunities for collaborative work with friendly states, and national global status and foreign relations. In brief, drafting the strategic and economic dimensions of some defence business cases may not be straightforward.
The new SOC in the Treasury’s direction asserts that the finance dimension should address not just the initial purchase costs: ‘Demonstrating the affordability and fundability of the preferred option requires a complete understanding of the capital, revenue and whole life costs of the scheme’. The guidance emphasises the importance of whole-life costs but does not (and could not) give the MoD direction on how they should be calculated.
The calculation of likely annual costs of ownership and whole-life costs in defence is a challenging and difficult business, not least because it must address the interacting effects of a range of factors including manpower, infrastructure, simulators and (expensive) support equipment, and will vary with usage rates, modes of use, forecasts of sub-system and component reliability, and desired availability rates, as well as debates about precisely what should be included. The MoD’s current Integrated Logistics Support model covering the things that have to be taken into account for equipment support has 15 elements, all of which should be costed.
At least outwardly, the MoD guidance in JSP 655 for the financial dimension does not take things much further: it refers to ‘an initial estimate (VROM) [Very Rough Order of Magnitude]’ of total programme costs (pan-DLod). The guidance for the next stage, the OBC, does not refer to whole-life costs but requires the sponsor to ‘Identify how affordability will be achieved through the life of the programme, and within TLB [Top Level Budget] portfolio’, and then demonstrate that the total cost of the overall programme has sound justification. Even the FBC Guidance says only that ‘A realistic plan for affordability of the complete programme’ must be available. The finance dimension refers only to the need to ‘demonstrate that costs to deliver the solution have been appropriately calculated and assured independently. They should be estimated at 10/50/90% confidence’. It does not make any specific reference to cost calculations for the use of the solution throughout its life.
Thus, it is not clear that the new business case structure will ensure that the MoD will improve its understanding of whole-life costs, despite the reality that, however they are measured, such costs significantly outstrip purchase costs for a major system over a decade and so are extremely important. Moreover, project sponsors at an early stage may continue to be reluctant to pay much attention to them either because they fear high (but realistic) figures would hit a project’s chance of survival, or because they are just more interested in initial equipment performance rather than reliability. The National Audit Office, the parliamentary watchdog, reported in June 2020 that, 22 years after the launch of the carrier programme in 1998, the MoD (and by extension, the Royal Navy) do not have a confident understanding of its costs.
Certainly, the implementation of the new approvals stages needs to be monitored for how whole-life costs across all DLoDs are actually addressed in business cases. The more detail and precision are generated, the better the defence enterprise and its funders will be able to compare forecasts against actuals once a system is in service.
Clearly, operating government-wide direction into the defence context is not going to be straightforward. It will press further the military sponsors seeking to establish new projects to think holistically from an early stage, including about their economic consequences. It is overtly a methodical approach to project definition and delivery. A successor piece will explore the issue of whether such a measured approach is always sensible to today’s defence context and address other strengths and risks of the recent changes.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.
Professorial Research Fellow
Defence, Industries and Society