Extracts of a speech delivered by Secretary of State for Defence at the Financial Times Annual Defence Dinner, London on Thursday 15 September 2011.
In December 2005 David Cameron invited me to be the Shadow Secretary of State for Defence.
Probably the only good thing about opposition, and even that is stretching the point, was that we had time to think about how we would change the way business was done or indeed what parts of the business needed changing.
I want to talk to you this evening about how we are taking that forward and importantly about the intellectual underpinning of the transformation in the way business in Defence is done.
Let me reflect first on what we inherited.
The one thing that everyone in the Defence Community could agree on was that change had to come - how painful you thought it was going to be depended on your optimism or indeed your pessimism.
While the depth of the black hole in the Defence programme was difficult from the outside to pin down, the symptoms of the disease were on show for everyone to see.
Projects were regularly and almost routinely delayed or cancelled, fleets were consistently salami-sliced, in-service dates were delayed by months or even years.
Consequently costs continued to grow ever more out of control.
As Bernard Gray said in his 2009 report “(the MoD has) 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”.
In their final year in office alone the previous Government presided over an increase of reported cost by a staggering £3.3 billion in just two programmes.
Regardless of the state of the public finances, simply from a management point of view, this would have to be tackled.
Because of the state of the public finances we inherited, there was no question of just pouring money into the hole that was left behind.
As I told the audience at DSEI this week, for a politician, it is painful to be a hawk on the deficit as well as a hawk on Defence.
It is unfortunate that the moment of transformation had to come at a time when the public finances were under so much pressure.
But what the crisis has forced us to do in Defence - and indeed more widely across government - is face some harsh but necessary truths.
Let me draw out for you two that are relevant here.
ECONOMIC WEAKNESS IS A NATIONAL SECURITY LIABILITY
First, tackling the crisis in the public finances is not just an issue of economics but an issue of national security too.
Debt is a strategic issue.
Or to be brutal - you cannot be secure if you’re broke.
Let’s just look at the figures.
Even with the Coalition’s aggressive action, the Office for Budget Responsibility forecasts public sector net debt to peak at over 70% of GDP in 2014/15.
Our current national debt is roughly equivalent to almost a quarter of a century of spending on Defence at the level of this year’s budget.
The interest, just the interest, paid out last year alone was £43bn - greater than the annual budgets of the MoD, plus the Foreign Office, plus DfID put together.
Next year the interest payments will be in the order of £50bn.
Does this matter?
Well, the lessons of history are clear - from the Roman Empire to the Soviet Union - even Britain’s own 20th century history bears this out - relative economic power is the wellspring of strategic strength.
Structural economic weakness, if not dealt with, will bring an unavoidable reduction in our ability to shape the world.
In Defence terms, without sound finances and a sustainable Defence programme the inevitable result in the long-term is a collapse in capability.
The Coalition has acted to address both the structural economic weakness of the country and the unsustainable defence programme in order to avoid these outcomes.
We are not alone in doing this although we may have been the first or at least amongst the earliest to act.
The same process is also now taking place in the United States.
But this is why our approach to Strategic Defence and Security Review had to be logical and unsentimental and include realigning our Defence priorities with the economic realities.
But the vision of Future Force 2020 - supported by the fourth largest Defence budget in the world and by real terms rises in the equipment programme in the next spending period - is a vision that maintains formidable capability - from nuclear weapons to aircraft carriers, from state of the art jets to precisions weapons, from multi-role brigades to cyber defence - an adaptable defence posture for a volatile dangerous and unpredictable world.
TRANSFORMING THE WAY THINGS ARE DONE
The second harsh truth from the state of the public finances is this - just as throwing money at problems doesn’t automatically produce improvements, simply cutting things does not bring your budget into balance in the long-term.
Unless you change the way you do things, you risk history repeating itself.
So the drivers of financial instability and the lack of accountability in the management of Defence had to be tackled too.
And that is what I want turn to now.
I chose an approach of simultaneous reform rather than sequential reform because the vision of the SDSR will be unachievable if not accompanied by a management system robust enough to deliver it.
That is why I set up the Defence Reform Unit under Peter Levene before the SDSR had been completed.
He was very clear in his critique.
A department with overly bureaucratic management structures, dominated by committees leading to indecisiveness and a lack of responsibility.
A bloated top level defence board without Ministerial membership allowing strategic decision to drift and unable to reconcile ambition with resources.
Budget holders without the levers needed to deliver and Ministers kept in the dark.
In response to his report we have initiated a transformation in Defence in not seen for a generation.
In particular, three key changes have to be made in contrast to what went before.
First - We have to have confidence that what is being ordered can be afforded.
Second - we have to live with our means - there has to be a mechanism for the real time control of budgets so that if things start going wrong they can be identified and dealt with.
Third - authority has to be aligned with responsibility - so budget holders have the levers to deliver and the incentive to do so but can also be held to account for failure.
Let me take each of these in turn.
COMMITMENT CONTROL REGIME
First, the commitment control regime.
Despite the fact that ministers in the previous government knew the Defence program was unsustainable they continued to add new elements to it knowing that there were no secure funding in the budget to finance them.
Too often, in order to get projects included in the programme, fantasy numbers produced by the MOD and Industry were accepted at the outset knowing that cost overruns would have to be recovered later.
By looking at and approving programmes in isolation from the totality of departmental spend any programme can be made to look affordable.
But when they are considered together, the cumulative risk and cost become unmanageable.
These practices in the MoD would not be tolerated in the private sector and they will no longer be tolerated in the MoD.
A risk-aware and cost-conscious mentality must permeate every level at the Ministry of Defence, civilian and military alike.
The commitment control regime means that guarantees of realistic budgets for development, procurement and deployment must be presented to Ministers before spending can begin on new programmes.
A good example of this in action is the recent order placed for 14 Chinook Helicopters - 12 to expand the fleet and two to replace losses in Afghanistan.
As the Financial Times wrote at the time “The broader significance of the order may now be less to do with the extent the new aircraft will boost airlift capacity, and more to do with what it conveys about the MOD’s procurement system.”
That is true.
I was not willing to sign the order unless I had a budget that I could guarantee.
I also sought guarantees that the projected costs had been thoroughly vetted.
This is all part of the commitment control regime run by my Permanent Secretary Ursula Brennan and Chief of Defence Materiel Bernard Gray.
As we went through the SDSR I was never convinced that the Department was in full control of the facts about real costs.
Having brought Bernard Gray in and having asked him to thoroughly scrub the equipment programme, I think we now have a much better and more rigorous idea of what things really cost.
This was one of the most positive results of the recent three month exercise we undertook to prepare for the next annual planning round.
During that exercise I said to the Department you need to give us all the information that we need because if you come back afterwards and say ‘by the way this is actually costing a bit more’ you will have to find it from somewhere else inside your budget.
This brings me to my second key change.
MAJOR PROJECTS REVIEW BOARD
Having a realistic projection of costs and a budget to meet them is only the first part of the jigsaw.
Keeping to budget, as anyone in the private sector knows, requires real-time control.
But there was a complete lack of process within the MOD to achieve that and no system to hold to account project leaders in the MOD and indeed in Industry for failure.
So first we had to initiate a process of regular review - that is what the Major Projects Review Board (MPRB) is all about.
The 20 biggest procurement projects which make up 80% of the equipment budget are now reviewed on a quarterly basis.
If a particular programme is showing signs of incipient failure, then those responsible are brought in front of the Board to explain the problem and to outline the proposed way ahead.
Of course problems can lie with the MOD or with Industry or both - but I believe, when public money is involved, that the public has a right to know where things are going wrong.
I think it is perfectly reasonable when Government and Industry are working in constructive co-operation that shareholders and indeed the stock market are kept informed of progress.
I am determined that the discipline of the market should apply as much to Defence as it does other areas where Government is investing in infrastructure over long-timescales.
This external discipline is now regularly and routinely being applied.
And it is exactly this discipline that is required if we are to ensure that the Department lives within its means.
AUTHORITY AND CONTROL
The last fundamental change I want to address is on authority and control.
If the MOD was in the private sector it would be the third biggest company in Britain.
But we inherited a management system where the Secretary of State didn’t even chair the board.
It is part of my basic Conservative philosophy that politicians shouldn’t try to tell people how to do the jobs they are trained to do.
We should set out what we want the outcome and the output to be and then we should leave professional people to make those judgements.
I have no intention of micro-managing the Armed Forces which is why we have reconfigured the management structure of the Department - including the Defence Board.
Key to this is empowering the Service chiefs to run their own individual services.
The single service chiefs are the custodians of their services, the fundamental building blocks of defence.
In the new model, the Service chiefs get a clear strategic direction within set budgets that enables them to carry out the detailed military capability planning needed across equipment, manpower and training.
Once that is agreed, they will be given greater freedom to veer and haul between priorities within their own service to deliver what is needed in Defence.
They will enjoy long-denied freedoms, and they will be held robustly to account for doing so.
A lot of what I have said this evening are procedural changes which to the average tabloid reader would seem to be meaningless.
Of course as you are all FT readers I’m sure you agree that this will bring an essential discipline to how the Ministry of Defence operates.
This is not to say that the difficulties have ended.
But I am confident that we are on the right path.
A path that leads not only to a balanced Defence budget, but also to Armed Forces able to keep our citizens safe, and to project the military power required to do so at a distance.
Britain will remain one of the few countries in the world able to do just that.
In this last 16 months we have achieved much in the Ministry of the Defence - the SDSR, the Armed Forces Covenant, the Defence Reform Unit, the Reserves Review, the Basing Review.
We’ve set up the Defence Infrastructure Organisation and the Defence Business Services Organisation.
We’ve reconfigured the management system, set up the Major Projects Review Board, set up the Defence Exports Support Group and set up the Defence Suppliers Forum.
We’ve begun the transformation in the management of Defence from a cumbersome Cold War bureaucracy to an adaptable 21st century organisation.
And while we have done so, our Armed Forces have been proving themselves again and again on operations - in Afghanistan - in the skies over Libya - on their standing tasks around the world.
People often say to me that I must have one of the worst jobs in Whitehall, but I think exactly the polar opposite.
I think I have one of the best jobs in Whitehall.
I am working with some of the best minds in Britain in the Military and in the Civil Service and in Industry.
I have the absolute honour of seeing day in and day out the professionalism, courage and commitment of the men and women of our Armed Forces who do some of the most difficult jobs in the most dangerous of circumstances all around the world.
I am enormously proud of what they are achieving - I’m humbled to be nominally in charge of them and I’m proud of what is being achieved at the Ministry of Defence.