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UK Backs Off Contractor-Operated Procurement - for Now

Dec. 15, 2013 - 03:45AM   |  
By ANDREW CHUTER   |   Comments
UK Defence Secretary Philip Hammond
UK Defence Secretary Philip Hammond (UK Defence Ministry)
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LONDON — Britain plans to adopt a new equipment procurement and support organization in April, but it’s not the government-owned contractor-operated (GoCo) plan officials hoped to implement.

The shortage of companies willing to take the risk associated with privatizing the management of the Defence Equipment & Support (DE&S) organization finally forced Defence Secretary Philip Hammond to admit defeat Dec. 10 and opt for Plan B — a beefed-up version of the government’s current organization.

Yet those hoping this might be the last they see of the controversial GoCo arrangement to manage Britain’s £14 billion (US $22.9 billion) annual equipment and support budget might be disappointed — Hammond has threatened to resurrect the scheme on the other side of 2015’s general election.

But Hammond will likely have departed the Ministry of Defence whatever the election outcome, and the DE&S changes will need to be established. With a strategic defense review and comprehensive spending review slated immediately after the election, a competition to run the government’s procurement effort is unlikely to be a priority, defense executives said.

The Conservative-led coalition government’s preference to hand over management of UK defense procurement to industry drew concerns at the Pentagon and interest across the world. Now that interest will focus on the so-called DE&S Plus, involving what the MoD describes as a central government trading entity.

Industry bidders looking to secure part of the £160 billion that Britain will spend on military equipment and support over the next 10 years will encounter a new DE&S Plus, boosted by relaxed civil service rules. The rules had prohibited recruitment of highly-skilled, high-priced executives to manage programs and other functions alongside private-sector strategic partners brought in to oversee key business elements.

One executive said the “crux of the DE&S update is how fast can they embed the high-level management systems they need, and whether the organization can upskill at the speed it wants.”

The move has been generally welcomed here by industry and others, with the caveat that the DE&S Plus transformation not be sidetracked, like many previous arms procurement initiatives.

Industry's Response

Publicly, the defense industry has strongly favored the MoD’s transformation agenda, but it is agnostic about how the government achieves the desired results.

Privately, senior executives voiced concerns about how the GoCo plan would work, including fears that company secrets could be exposed to other contractors.

“From an industrial point of view in terms of understanding how the system you are interfacing with works, the DE&S Plus is nearer the status quo than the GoCo,” one executive said. “The latter imposed a number of new interfaces, and we had no idea how that would be handled.”

Paul Everitt, the CEO of ADS, the national defense and aerospace trade association, said it is “inevitable that people are more familiar with the DE&S type of operation and easier to imagine how that might progress, whereas with the GoCo, there were more uncertainties. You might argue this provides a stepping stone towards a GoCo at some future point.”

Hammond told Parliament the new organization would procure private-sector expertise through a series of support contracts to deliver “key changes to systems and processes, and to strengthen program management while organic capabilities are built.”

He said, “What we envisage in the DE&S Plus model is probably three separate contracts: one to provide us with program management support, a spine for the organiza­tion; one to provide us with [human resources] support, an area of particular weakness in DE&S; and a task-and-finish project to install some additional financial control systems within the organization.”

The new organization will be accountable to Parliament, have its own chief executive and an independent chairman.

The DE&S boss and GoCo architect, Bernard Gray, has been appointed as the new CEO — a move that drew heavy criticism from some members of the House of Lords during a debate last week.

That prompted two ex-defense secretaries from previous Labour Party administrations to step in to defend Gray in a Dec. 13 letter in a national newspaper.

Few MoD officials stir the emotions quite as much as Gray. One senior executive said the ex-reporter and businessman is like a “jar of Marmite — you either love him or hate him, but you can’t deny he has already driven some significant change through the organization. He isn’t always going to be popular with industry or some of his colleagues, but he does make things happen.”

The parliamentary defense committee said it would raise the issue of Gray’s appointment to his new role during hearings next month.

Hammond decided to halt the MoD’s GoCo work after one of the two final bidders for the management contract withdrew in mid-November, just hours before bids were due to be submitted. This left only a Bechtel-led consortium called Materiel Acquisition Partners in play alongside the DE&S Plus in-house proposal.

A bid was prepared by a CH2M Hill-led consortium involving local companies Serco and Atkins. But it was not submitted after the MoD was informed 24 hours before the deadline that the consortium was withdrawing.

Hammond told the parliamentary defense committee Dec. 12 the consortium, known as Portfield, was not confident of earning sufficient returns to justify the up-front investment required.

A GoCo operator would earn a fee only once it could demonstrate it had contributed to savings in procurement negotiations with suppliers. Lack of baseline management information systems at DE&S made that difficult.

Hammond said the withdrawal of the CH2M Hill-led consortium meant MoD did not have a competitive bidding process, so the “risks of proceeding with a single bidder are too great to be acceptable.

“I have ... decided to build on the DE&S Plus proposition, transforming DE&S further within the public sector, supported by the injection of additional private-sector resources, ensuring that the organization becomes ‘match-fit’ as the public-sector comparator for a future market-testing of the GoCo proposition,” he said.

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