Speech

Delivering value for money and innovation in defence

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by Philip Hammond, Secretary of State for Defence.

Introduction

Our armed forces exist to protect our country and provide the ultimate guarantee of its security and independence.

This must be the first duty of government, and everything we do in defence is directed at supporting that objective.

Generating the military capability required to meet the needs of national security;

And delivering that capability on operations.

This is one of the most fiendishly complex tasks of government.

And one of the most expensive.

With resources as tight as they are, the obligation to deliver value for money is paramount:

Making sure every pound of taxpayers’ money spent on defence has a tangible impact on delivering capability to the front line and on the security of the nation;

In other words, enhancing the efficiency of defence delivery.

And today I want talk about how, over the last 2-and-a-half years, we have set about reforming the way defence is managed to deliver that improved efficiency:

  • restructuring the MOD
  • reconfiguring our armed forces
  • balancing the budget
  • setting the equipment programme on a sustainable course

And because none of this would be possible without the people who make up defence, I want to say a bit about how we will modernise the offer that we make to the men and women of our armed forces, so that their terms and conditions, while they will never look like those associated with civilian employment, better reflect lifestyles in the 21st century.

But I want to start by recapping the scale of the reform challenge we face.

Transformation

The 2010 ‘Strategic defence and security review’ kick-started one of the biggest change programmes taking place anywhere in the western world:

A change programme essential to ensuring that our armed forces can continue to defend our country, protect our interests and project our values abroad;

In the face of a complex range of threats in a rapidly changing environment;

Building the powerful, adaptable and, crucially, sustainable armed forces we require;

Equipped with some of the best and most advanced technology in the world;

And all at a cost that the country can afford, and on a scale that we can sustain.

But this change programme isn’t just about meeting the Future Force 2020 structure set out in the SDSR.

It is also about changing the way we deliver defence to make sure we don’t repeat the mistakes of the past.

The overheated equipment programme this government inherited was a symptom of a much deeper malaise that was fundamentally about the way in which the department operated.

Lord Levene’s Defence Reform review set out clearly what the problems were:

  • a focus on short-term affordability at the expense of long-term value for money, and a lack of financial rigour throughout
  • a head office, which was trying to micro-manage from the centre, disempowering the people who actually deliver in the service commands
  • confusion over who was accountable for what
  • few levers for those who wanted to innovate and change behaviour
  • an over-complicated and fragmented structure; and
  • an unbalanced relationship between the department and its suppliers, with poorly aligned incentives driving sometimes perverse behaviours

Getting these problems resolved is every bit as important as eliminating the inherited black hole in the budget if we are to deliver sustainable, long-term change.

Without fundamental reform in the way the budget is managed, the way decisions are taken, and how defence is run, the same problems will rematerialise.

So we are getting on with implementing Lord Levene’s recommendations which we accepted in full:

Changing the behaviours so that we do not repeat the same mistakes again;

Focussing on long-term value, not short-term cash;

Delivering value for money by making sure we have modern, innovative ways of doing business, where people accept responsibility for decisions and have the power to make them;

Allowing us to weed out duplication, red tape, perverse incentives, waste and delay.

Taken as a whole, this is a 10-year reform plan.

And now, halfway through this Parliament, and half way between 2 SDSRs; a-year-and-a-half on from the defence reform review; it is worth reflecting how far we have come already.

Progress

When I came into the department, many of the tough decisions on force structure had already been taken: to shrink the size of the MOD; to rationalise our equipment programme; and to reduce the size of the navy, army and the air force, while increasing investment in the reserves.

They just needed implementing!

And the senior management was beginning the process of changing the way defence was managed.

I make no apologies for the fact that I chose to focus on the money first.

There was no option of continuing the ‘finger in the dam’ approach to defence budgeting, which had resulted in the MOD lurching over a decade from budget crisis to budget crisis:

Salami-slicing each year in the hope that “something would turn up” to fund the programme in the next;

Pushing projects further and further to the right in an unsustainable and ever-expanding bubble;

Budgeting based on fantasy rather than reality.

This ill-served the taxpayer, who ended up paying more for less.

It ill-served the defence industry, who found it impossible to invest with any certainty.

And it ill-served our armed forces, who could not plan with confidence [CHECK WITH SPEECHWRITER] politicians promised them would be delivered on time, to requirement and in the numbers expected.

So we have instituted an integrated financial and military capability planning process:

Programming prudently rather than optimistically, so that we can focus on value rather than on cash management; with a proper centrally held contingency reserve against the equipment programme, and (an innovation in MOD terms) an annual departmental unallocated provision:

Moving from a culture of spending first and working out how to afford the long-term costs later to one of only committing to what we can be confident that we can deliver;

Living within our means, rather than systematically planning beyond them.

With our new cost controls in place, no project can be committed without a 10-year budget line to cover not only its procurement, but also its support costs;

And we allocate projects to the committed core programme only at the point when they need to be committed in order to be delivered on time, and only in accordance with the military assessment of priority at the time;

Ending a long-established “conspiracy” between the industry and the department to “lock in” unaffordable projects.

By maintaining these simple disciplines, sensibly managing in-year budgets, and forecasting prudently, we are changing the dynamic in the equipment programme.

Of course, we still have to live with the legacy projects, against which we have now made prudent provision of financial contingency.

They will continue to have a negative effect on the department’s public reputation for project management as their original fantasy budgets and timelines are exceeded.

But we can now make choices, based on military priorities, about which new capabilities we can afford, rather than which bits of the programme we have to cut.

And by delivering this budgetary discipline we are already demonstrating the benefits to the armed forces and to industry.

Adding projects when it is safe to do so, not cutting them because we have run out of cash.

Since I announced in May that we had achieved a balanced budget, I have been able to give the go-ahead to some half-a-billion-pounds of further investment in equipment and support, including targeting pods for fast jets, better protection systems for Tornado GR4, enhancements to Merlin helicopters and new Foxhound vehicles.

And further announcements are imminent.

This year is, I am told by old lags in the department, the first in living memory that the MOD has not had to sit down in September and decide which programmes need to be cut or delayed in order to remain within spending control targets;

A major step forward for the MOD and for the armed forces.

Defence reform

So, we have started to see the benefits of change.

But if we want them to be sustained, we need to ensure that the changes we are making in how defence is managed become engrained in its culture;

So that budgetary discipline becomes the supporting foundation of everything we do;

That sustainability is considered in every decision;

Building in a focus on value for money;

Changing structures and incentives to change behaviours;

Encouraging innovation to improve delivery;

Locking in the significant reductions in running costs we are achieving by making the organisation more efficient.

We are already on course to save approximately £2 billion in non-front-line costs in the year 2014/15, compared to 2010/11 baseline.

The majority of this saving will be sustainable reductions, so we can expect to maintain high-levels of savings in following years.

Over a 10-year period we expect to save around £15 billion of non-front-line costs.

How?

First, we are pushing authority and accountability down the chain of command.

Giving Top Level Budget holders the freedoms and incentives they need to drive efficiencies and improve delivery in their organisations.

Head office is becoming smaller, on course to shrink by 25% by 2014.

The newly constituted Defence Board, which I chair, has been meeting regularly over the last year, providing strategic direction to the organisation.

The delegated operating arrangements for service commands will go live in April 2013, including for the new Joint Forces Command which was stood up in April of this year [2012].

Each service is doing detailed work on its own operating model, identifying which activities are to be modified or stopped, and where to prioritise resources.

But the bottom line is that they will have much greater control over planning for future capability requirement;

Deciding where to concentrate resources to provide maximum effect;

Taking responsibility for living within the means provided, but with the freedom to innovate and establish better ways of doing things.

The second thing we are doing is bringing in private sector skills where we judge it necessary to help change behaviours and drive efficiency.

Defence Business Services has been set up in a partnership with SERCO, who are providing the external management team to transform the organisation into a lean and effective shared services centre, building on best practice outside the public sector.

The Defence Infrastructure Organisation brings together all aspects of defence infrastructure asset management and facilities management under one organisation for the first time.

It is now in the process of recruiting a strategic partner to help transform its business.

And perhaps most significantly, the work to overhaul procurement, the Materiel Strategy, is developing fast.

The criticisms of the acquisition process in the Defence Reform review were anticipated by Bernard Gray’s report for the previous government.

In the past, defence has lacked the right business skills and capabilities to manage what are some of the largest capital and infrastructure projects being undertaken in the UK today.

And the MOD has, too often, been a poor customer for industry, and in some cases, a soft touch.

So we are setting out to create a proper interface between the Defence Equipment & Support organisation and the defence customers it serves, enabling it, in turn, to be a more effective customer for its suppliers.

This will require the recruitment of a private sector partner to deliver the high level commercial and management skills that we currently lack.

We are currently testing the value for money case for a government-owned, contractor-operated, or GOCO, entity.

A final decision on the precise structure will be made in due course, but the bottom line is that the reformed DE&S, supported by a strategic partner, will be better by design at negotiating and managing contracts for the benefit of the taxpayer.

With the private sector partner injecting key disciplines, processes, skills and management freedoms into MOD’s procurement activity.

By refocusing the head office to providing strategic direction rather than micro-management, by empowering the service commands and other parts of defence to deliver and to innovate, and by bringing in private sector partners with the skills and flexibilities to help them, this programme will deliver behaviour change from the bottom up.

People

This is a massive change agenda: In the armed forces, in the MOD and across the support organisations like DE&S.

And change is often uncomfortable for the people at the heart of it.

So let me say unambiguously that our people in defence are our biggest asset;

All of them:

The men and women of our armed forces, regular and reserves; the civilians who support them; and the people who work in the industries which supply them.

We need to rebuild the trust of all of them after a period of sometimes traumatic change.

But I want to say something this morning specifically about how we will address the challenges of recruiting and retaining for the armed forces once the lure of deployment on operations is gone as we withdraw from our combat role in Afghanistan by the end of 2014.

And, hopefully, against the challenge of a healthier civilian economy as a competitor for talent.

Service personnel

One of my big learning curves over the last year has been understanding the unique nature of what the military call the “moral component” of defence;

What it is that provides the “will to fight”, and the determination to win.

What it is that allows us to recruit some of the best people the country can provide to preserve the unique attributes of our armed forces.

What gives us our edge over other countries, many of whom have larger armed forces and similar equipment to us, but very, very few of which can come close to matching our military capabilities.

It is our people that give Britain’s armed forces their special quality.

But I know that some of them feel, perhaps many of them feel, they have taken a bit of a pounding over the last couple of years.

Redundancies; downsizing; restructuring; relocation; re-roling for the post-Afghanistan world.

And all while fighting a long and difficult counter-insurgency and stabilisation campaign.

It must often have felt like the perfect storm.

The future armed forces will continue to offer careers that are exciting, challenging and rewarding.

But if we want to continue to recruit and retain the best people, both regulars and reservists, that may not be enough.

We have to ensure that we can compete to attract them.

And it has been 40 years since the current package of terms and conditions was last fully updated;

In the meantime it has been adapted and modified on an ad-hoc basis;

So that now, it is costly, complex, impenetrable and inflexible.

In many ways, it fails to meet the requirements of today’s service personnel, or to reflect the needs of modern family life;

So we need to modernise the offer we make to our people.

New employment model

And in doing so, we need to achieve 3 things:

First, we need to secure for defence the people it needs, both in terms of quality and quantity:

Recruiting to preserve the unique attributes of the armed forces by drawing adventurous, spirited and committed people to the ranks.

Secondly, we need to reflect the changes in social, demographic and economic conditions in our society and the complexities of modern family life.

There is no identikit soldier, sailor or airman;

Each one is an individual, with different needs at different points in their careers.

There is no identikit service career;

What a young recruit wants from the package may be very different from an NCO in his late 20s with a wife and small children, and we have to make sure that what we provide is an attractive offer for both.

Thirdly, the package needs to be affordable and sustainable in the long-term.

Attractive to service personnel and fair to the taxpayer.

But let me be clear: this is not a cost cutting exercise.

When we look at the structure of pay and allowances it will be to make it more flexible and more responsive to individual needs as well as to better reflect the priorities of the service.

But within an envelope that is broadly cost-neutral overall:

Designed to deliver better value to the individual at the same broad cost to the taxpayer.

We call this project “the new employment model”, or NEM.

In fact, it isn’t a single project at all but a number of distinct workstrands addressing different challenges.

It’s not about overnight transformation.

It will be a process out to 2020 and beyond:

Designed to meet the expectations of a generation that has yet to join the Service, as well as our current Servicemen and women.

Some elements are capable of being delivered relatively early while others will take longer to develop.

At the heart of the NEM will be a measured shift in the nature of the offer:

Towards a greater emphasis on individual value, personal choice and responsibility;

Ensuring greater value to the individual through more flexible tailoring of the complex package that makes up armed forces remuneration;

And more stability to service families through fewer moves, more opportunities for employment of the partners and greater opportunities for home ownership.

Housing and spousal employment

Accommodation lies at the heart of this challenge.

The majority of our regular service personnel rely on publicly-provided accommodation because the job currently demands a very high degree of mobility around the UK, and sometimes beyond.

In a 22-year career, as currently structured, a typical service person could expect to be asked to move 10 or more times.

We want this to change.

As we bring the British Army back from Germany, we want to offer more stability, and in doing so make it possible for families to set down roots as civilian families do:

Greatly reducing the need for family moves;

Enabling the children of service personnel to be settled in one area, and to avoid frequent changes of school; and

Making it easier for partners of service personnel to find work.

Everything we do must of course be done in a way which continues to support operational capability.

But our goal is to enable service personnel more freedom to make the choices that other people make:

About where to live;

And about whether to rent or buy.

Currently, home ownership rates among current and former members of the armed forces are comparatively low, suggesting an element of systematic disadvantage, something which the armed forces covenant commits us to address.

So, alongside a steady improvement in the quality of service accommodation, we want to increase access to home ownership for Service personnel, providing realistic lifestyle choices to our people.

There are a number of ways this could be achieved and we will look at developing a range of options.

The stark fact is that people in the armed forces, with a generous, non-contributory pension scheme, are accumulating significant wealth during their service.

And a significant part of their total remuneration package cost that wealth creation but without them being able to access it to facilitate house purchase.

Something that disadvantages them compared to others.

So, the challenge we have set ourselves is to explore models that would allow our people either to directly access some of that accumulating wealth or to use it to collateralise mortgage borrowing:

Supporting forces home ownership;

And removing an important element of disadvantage service people face relative to their civilian counterparts.

This would not, of course, remove the need for service accommodation.

Especially for younger, single service people, this will often be the right choice, or indeed, the only one!

The armed forces will continue to provide subsidised accommodation for those who require it.

Of course, whether you are in the forces or in a civilian job, taking on the responsibility of home ownership these days often requires 2 reliable incomes.

So making it easier for the partners of service people to find and keep work is a critical precondition to boosting home ownership.

Making military basing more settled will be a big step forward.

But I also recognise that some bases, by necessity, are in relatively remote locations with limited employment opportunities for partners.

What can we do about that?

One of the areas I want to explore urgently in 2013 is how we could use parts of the military estate to stimulate local economic growth and employment generation around garrisons, by providing incentives for business relocation to land that we hold.

Thus creating conveniently located job opportunities for the armed forces community.

As a whole, the new employment model will include everything from the accommodation and home ownership issues which I have discussed today, to overall pay structure, training and education needs, career management and manpower control.

The NEM will support both regular and reserve personnel, and will build on the whole force concept and the integration of regular and reserves which I set out earlier this month.

Next year, we will begin consulting with service personnel, and testing some of the ideas we are developing on the people they are designed to benefit.

Conclusion

I have set out this morning, the progress we have made on one of the most ambitious transformation programmes ever undertaken.

A programme necessary to ensure that our armed forces are affordable and sustainable, as well as flexible and effective in the face of both fiscal challenges and strategic uncertainties.

We should not undervalue what we have already achieved;

But we should not underestimate the scale of what is still to be done.

We have defined the new structure of our forces and the shape of the MOD that will support them;

We have developed our plan to bring the army home from Germany;

And an equipment programme which can be delivered and afforded;

The mechanisms to maintain budget discipline are in place.

But that is, relatively speaking, the easy bit.

The real, long term challenge is to change behaviours, align incentives and shift the culture;

So that the resource discipline that we have imposed feeds through into sustainable, bottom-up efficiency gain, not reduction in output.

In other words, the challenge is now to improve the productivity of every part of the defence organisation.

Rejecting the notion that a given percentage cut in the defence budget must inevitably mean a similar percentage cut in our military capability.

To do that requires a motivated and engaged workforce;

One that recognises the challenges we are facing;

Shares our vision for the future of defence;

Understands the plan for delivering it;

And feels a valued part of that plan.

In an era of redundancy and pay restraint, that is a big challenge.

But it is the one we must now address;

Through greater empowerment, both personal and professional;

And through better delivery of value to the individual from the remuneration package.

That is the key task for 2013 for the leadership of defence.

None of us is in any doubt about the scale of that task;

But neither do we doubt its centrality to everything we are doing.

Thank you for listening.