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The Defence and Security Industrial Strategy (DSIS) deals with both the defence and security markets, noting their different structures in terms of both numbers of customers and suppliers. This Commentary, however, deals only with the defence world.
A welcome strength of the paper, for which the Ministry of Defence (MoD) should be applauded, lies in its readiness to accept that some of the changes of the past decade and earlier have not worked as well as hoped, and should therefore be abandoned. The rejection of a sector approach to the defence industry, a feature of the 2012 National Security Through Technology document, is reversed, and the need to review the Single Source Contracts Regulations with their significant restrictions on profit is acknowledged. What to do about the Single Source Regulations Office, which does not even get a mention in the document, must be an agenda item going forward. Significantly, the default procurement position will no longer be competitive procurement from the international market. Indeed, the much more nuanced approach to competition can be said to make the DSIS a revolutionary document, changing an MoD stance that has been in place since the early 1980s.
If there is a central message in the strategy, it is that a mutually supportive, partnered approach between the MoD and the private sector – already present in some parts of defence – needs to be widened and deepened. This is a valid argument, in part because the effects of competition in a far-from-perfect market often include unrealistic offers by the winners and a reduced scope for future competition: the rarity of major orders and the costs of staying competitive can induce losing firms to leave a sector. As the DSIS recognises, much of defence is also characterised by high entry barriers for potential new suppliers.
A further consideration is the speed of technological change in computing, electronics and software when more and more defence systems are becoming software-intensive. The defence secretary and the minister for defence procurement in their foreword to the DSIS observe that ‘our forces require equipment which is state of the art’. While this is not an ambition that many defence professionals would take too seriously, given that few even use a state-of-the-art laptop, there is widespread recognition that modular, ‘open systems’ in defence can be procured with incremental upgrades and constant improvement. However, designing and delivering such advances is difficult when customers and suppliers view themselves as being in a fundamentally adversarial situation, and when attention is focused on one big contract for a specified set of attributes.
The well-established aim of the MoD to increase the involvement of small and medium-sized enterprises should be advanced by the DSIS paper’s recognition of their needs. These include finance and rapid decision-making, concerns about unlimited liability contract clauses and support for their routes to market ranging from working directly with the armed forces to being brought into the supply chains of the larger primes.
The paper recognises that extensive international collaborative as well as national activities will be needed to deliver the DSIS. In this regard, it is clear that the UK is open both to novel forms of collaborative action and to working with a wider range of countries than the European governments that have dominated UK collaborative work to date. The DSIS is probably as positive as it could be regarding European collaboration, given the high-level political concern to underline the benefits of Brexit.
The paper also does not close off the UK market to external bidders, but sends strong signals that there will be expectations of UK operational control over foreign systems, as well as inward investment to the UK. This is a message presumably targeted at some US firms.
Collaborative activities are already blurring into exports. Within the discussion of what government can do to improve exports, an important change is a clear government readiness to take on the responsibilities of a supplier by using government-to-government deals – a practice long embraced by the US through its Foreign Military Sales machinery.
As for the follow-up from the DSIS, the paper recognises that some areas need further work, such as an industrial strategy for land equipment and data gathering on defence suppliers in the economy and society. However, there is also an awareness that any procurement policy stance is meaningless unless it is used to shape specific procurement choices, contracts and behaviours. The strategy will be implemented or ignored through spending choices.
There are two communities within governmental defence that may feel most challenged by this strategy. The first are those in the services and Head Office who deal with requirements and equipment replacement, as they will now have to think of the contract needs of industry to sustain industrial capability at the same time as providing users with the appropriate equipment. In countries that seek to sustain a significant national defence industrial base – such as France and the US – this can sometimes be difficult. In terms of the individual service control over their budgets that was a feature of the Levene reforms, DSIS will also increase the weight of the finance and capability, and the defence industrial and prosperity sections of the MoD Head Office.
The second community comprises the MoD Commercial staff, where any instinct to rely on formal competition and a clear contract to secure an easy ride through approvals processes and best value for the government needs to be replaced with a recognition that projects and programmes should be addressed on an almost case-by-case basis. Many Commercial staff will need to have an advanced knowledge of category management and to deepen their understanding of supply chains and corporate finance.
The government approach outlined in the DSIS document prompts the question of what is needed from industry. A fundamental point is the need for companies not to generate any suspicions of the complacency and sense of entitlement that led to the move towards subjecting them to open competition from the late 1970s. Their boards and workforces need to think long-term and to both recognise and take pride in their contribution to the protection of the country and its interests. As many already realise, they are effectively government agents located in the private sector. Clearly, pressures to export and for their work to maintain priority in the struggle for funding among projects within the UK budget discourage firms from ever feeling too comfortable.
A second consideration is that companies must expect to be asked to be more transparent with the MoD about their problems, progress and even intellectual property – not least so that governmental defence can take advantage of opportunities for upgrades and modifications. The DSIS does not address the balance of governmental and private sector players in the in-service support phase, although this is a constant topic of interest.
An ambitious element of the articulated strategic approach is that, by being more transparent about its intentions, the MoD will encourage companies to invest more of their resources in preparations and developments with confidence that a project and a contract will go forward. The paper marks the end of the long-term decline in UK research and defence development spending, moving it to over £1.65 billion per year on average, but this figure will remain significantly less than that in place in 2010. Some joint funding is a feature of the Tempest programme, a principle which it is hoped can be applied elsewhere. However, corporate confidence will take time to build, and so its generation will need to be a significant element in the implementation of the strategy.
Of the three governmental defence papers released in the past two weeks, the DSIS is the only one aspiring to the designation strategy. It addresses aspirations and proposes ways and means for their achievement. It depends henceforth on politicians and public servants for its implementation but on both government and its suppliers for its success.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.
BANNER IMAGE: HMS Audacious under construction. Courtesy of Defence Images/Andrew Linnett/OGL