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UK Warship Procurement Strategies – Accident or Design?

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Presentation on theme: "UK Warship Procurement Strategies – Accident or Design?"— Presentation transcript:

1 UK Warship Procurement Strategies – Accident or Design?
Stuart Young Deputy Director – Centre for Defence Acquisition +44 (0) Before I start I would quickly like to mention that the Centre for Defence Acquisition is part of Cranfield University, and we are the Academic Partner to the College of Management and Technology, one of the constituent elements of the Defence Academy of the United Kingdom. Many of you may well have heard of us in our previous incarnation as the Royal Military College of Science. I provide the Naval input into the Centre, having retired from the Royal Navy some eighteen months ago having been involved in a number of ship programmes including the Type 45 destroyer, the Future Carrier and the Future Surface Combatant over the past few years.

2 Agenda Background – Development of Naval Shipbuilding in the UK since the 2nd World War The Defence Industrial Strategy Case Studies Offshore Patrol Vessel Type 45 Destroyer CVF – Future Aircraft Carrier Conclusions My paper is quite long, so I will only be presenting key highlights today. However, in order to understand where we are today an overview of Naval Ship Procurement and the UK Shipbuilding Industry since the Second World War is vital. I also need to explain the relevant elements of the UK’s Defence Industrial Strategy before looking at three case studies from recent years before concluding. This is also a good time to mention the influence that the RAND organisation have had a warship procurement policy in the UK, and the various reports written by John Schank and his colleague’s are frequently referenced in my paper. I hope that I have interpreted their conclusions correctly!

3 Background – UK Warship Building since WW2
Focus on commercial ships immediately after WW2 – sellers market. Early 50s – first new ships since WW2. New technologies led to increased cost and delays. Development of competitors from shipyards in Europe and Far East – problems in UK shipbuilding exposed. Admiralty returned to competitive tendering – by 1965 ten shipyards closed or merged/ Proposal to reduce to 3 specialist naval shipbuilders. 1973 Oil Crisis – Ship building collapsed. UK Government nationalised the industry. Turning back the clock to the years immediately after the Second World War, life was cosy for the British Shipbuilding Industry. Demand for new merchant ships was high and business was good, but this provided little incentive to invest in new facilities, skills and processes. As new shipyards in Europe and the Far East became established, the inherent problems in British yards were exposed. And when in the early 1950s the Royal Navy began to order new ships for the first time since the war, British shipbuilders found difficulties in producing the modern designs, with all-welded construction and high pressure, lightweight machinery, and in integrating the new weapon technologies that were being developed. Delays and costs increased. The Admiralty’s response was to return to competitive tendering, which by 1965 had resulted in 10 shipyards merging or closing. A report at the time recommended that the industry was reduced to 3 specialist naval shipyards, but change was put on hold when the 1973 oil crisis resulted in nationalisation of the industry.

4 Background – UK Warship Building since WW2
1986 – Industry de-nationalised. Six yards designated as warship builders Competition and reduced number of orders led to further rationalisation – 3 yards, 2 companies Defence Industrial Strategy. Establishment of BVT Surface Fleet joint venture Signing of long agreement with MoD – cost savings (£350M) in exchange for guaranteed minimum workload (£235M/year) Buyout of VT by BAE Systems – now 3 yards, 1 company By 1986 the Thatcher government had succeeded in de-nationalising the industry. Surprisingly, they designated six yards as warship builders, which gave excess capacity in naval shipbuilding, although there was, perhaps, an eye on expanding warship exports, an area where the UK was unsuccessful compared to many European Yards. It also meant that the yards were prevented from getting any European Union funding, which further hindered their development. Over the next few years the pressures of competition and the reducing number of warship orders led to further rationalisation, and resulted in two companies, BAE Systems and VT, owning the three remaining warship yards. The Defence Industrial Strategy, which I will discuss in more detail, lead to the establishment of the BVT Surface Fleet Alliance, between these two companies. A subsequent agreement with the MoD guaranteed a minimum workload in return for costs savings. And, in the final twist in the tale, BAE Systems has now bought out VT, meaning that BAE Systems now own all the major warship building capability in the UK.

5 Defence Procurement Initiatives – 1998-2009
Looking in more detail at the last ten years or so in the United Kingdom there has been a plethora of policies and initiatives which have impacted on warship procurement. These included the 1998 Strategic Defence Review, and a new Defence Review is now long overdue - Preparation work is underway but the review itself will have to wait until after the next general election. SMART Acquisition, aimed at streamlining the acquisition process, soon followed. This has had some successes, but has failed to cure the curse of runaway major defence programmes. The Defence Industrial Strategy, published in 2005, lead to the Defence Acquisition Change Programme which in turn led to the introduction of Through Life Capability Management and the restructuring of the old separate Defence Logistics Organisation and Defence Procurement Agency into a single unit, Defence Equipment and Support, with responsibility for delivering equipment and logistic support capability through life.

6 Defence Industrial Strategy - Aims
Giving a strategic view of defence capability requirements going forward, by sector, and specifying which industrial capabilities the government wished to see retained in the UK for Defence reasons to meet these requirements. Providing details on the principles and processes that underpin procurement and industrial decisions. Investigating how the mismatch, or gap, between the MoD’s plans and the level required to sustain desired industrial capabilities onshore might be addressed. The DIS aimed to define the industrial capabilities that the government wished to see retained in the UK in order to provide a baseline for industry to plan and develop against. It also sought to increase transparency in defence and support planning on both the Industry and MoD sides by enabling a greater understanding of the principles, processes and drivers that underpinned procurement and industrial decision making. Finally, it tried, not entirely successfully, to identify where there was a mismatch between the MoD’s planned order book or intentions and the level of orders and business that were required to sustain industrial capability at the level required by the Defence Industrial Strategy – inevitably this was seen by many in industry as wishful thinking and they doubted the MoD’s ability, and perhaps will, to deliver its side of the bargain.

7 DIS – Maritime Sector – Key Points
Need only to retain a minimum ability to build and integrate complex ships in the UK. Priority to retain and develop the systems engineering capability to design complex ships and their combat systems from concept to the point of build, and manage and support the associated maritime capability through-life (50% of the spend in the maritime sector is on support). Need for the MoD to retain intelligent customer skills to control the procurement and support processes, with a particular focus on managing risk. Supported the establishment of an Alliance/Partnering approach In respect of the Maritime sector, the Defence Industrial Strategy made a number of key points. These included the intention to focus on a minimum ability to build and integrate complex warships in the UK. The DIS was relaxed about simpler ships, like support and patrol vessels, being designed and built overseas. The need to prioritise the retention of a systems engineering capability in support of complex warships was also recognised, as well as the need to support these ships through life within the United Kingdom, although this implied a greater steel work capability than the first key point requires. DIS reiterated the need to retain intelligent customer skills, with a focus on understanding and managing risk. This was in response to the mounting costs and delays in the Type 45 destroyer programme. Finally, as a generic principle across all defence industry sectors, it supported the establishment of partnering and alliancing arrangements, and the maritime sector has been at the forefront of progress in this respect.

8 DIS – What Happened BAE Systems and VT Group established a joint venture, BVT Surface Fleet, in July 2008, as a condition of the signing of contracts for the Queen Elizabeth class aircraft carriers. 15-Year Terms of Business Agreement (ToBA) signed between MoD and BVT in July 2009. 15 years exclusivity to BVT to design, build, integrate and support specified MoD shipbuilding programmes Maintenance of key industrial capabilities. Guaranteed savings of at least £350M over 15-years Aircraft Carrier Alliance Other Maritime Change Programme initiatives: Submarine Enterprise Collaborative Agreement Surface Ship Support Programme Alliance arrangement between MoD, BVT and Babcock Marine Maritime and Engineering Waterfront Support In the Maritime Sector, the DIS had a very large impact. As I have already mentioned, driven by a condition of signing contracts for the two new aircraft carriers, BAE Systems and the VT Group established a Joint Venture, BVT Surface Fleet, although VT’s share of this has now been bought out by BAE Systems. And a 15-year Terms of Business Agreement has been signed between the MoD and BVT. An Aircraft Carrier Alliance has been established, and other initiatives are underway under the auspices of the Maritime Change Programme. I would now like to look specifically at three case studies which I hope are of interest and relevance.

9 River Class Offshore Patrol Vessel
Urgent need to replace seven Island Class Offshore Patrol vessels, commissioned Roles: Initially Fishery Protection, Oil and Gas Field Protection Additional roles, by late 1990s Assisting HM Customs and Excise, Scientific and Environmental, Assisting vessels in distress Island Class did not have the capabilities to perform these roles effectively and were costly to maintain and support Acquisition timeline: Dec ITT issued Mar 2001 – Vosper Thorneycroft selected as preferred bidder May 2001 – Contract placed Jan – Dec 2003 – Ships entered service Total Cycle time – 3 years The River Class Offshore Patrol Vessel was a replacement for the patrol and protection capability which had previously been delivered by seven Island Class ships, which by the late 1990s were becoming ineffective in their widening role and increasingly costly to maintain and support. The time-line for the procurement of these ships is impressively short even for such a simple vessel – just over two years for the first ship to enter service and three years for the full capability to be delivered. It is worth examining in more detail why this short procurement cycle time was achieved.

10 The Proposal VT to lease three ships to the Royal Navy with Support and Maintenance provided through a Contractor Logistics Support arrangement VT retained ownership of the vessels and chartered them to the MOD for five years, with a daily charge for full Contractor Logistics Support VT guarantees 960 days availability per year across the three ships. Only when those ships are available for MoD tasking is the MoD liable for CLS costs. In its ITT the MoD had asked for innovative proposals but was surprised by the degree of innovation in the proposal it received from VT. As a member of the MoD’s Integrated Project Team at the time, I must admit it made tender assessment a very difficult but interesting process. VT proposed to lease 3 ships to the Royal Navy to provide an increased availability, at lower total cost, compared to the seven existing ships. The charter would extend for five years and include full Contractor Logistic Support days availability each year across the three ships would be guaranteed and the MoD would not be liable for CLS costs if the ships were not available for tasking.

11 Why was short Acquisition Cycle Time achieved?
Economic - Island Class ships expensive to maintain. Pressure to reduce short-term support costs. Gapping the capability was not an option. New, cheaper solution urgently required. Smart Acquisition – Senior MoD management under pressure to deliver early Smart Acquisition savings. OPV provided an opportunity to deliver clear savings in the short term and demonstrate to politicians and tax payers the success of Smart Acquisition. Political – In Dec 2000 VT issued redundancy notices to half its workforce. Considerable political pressure to ensure that VT won the contract with an order for at least three ships to maintain jobs and keep shipyard open. Eventually only 120 jobs were lost. This attractive proposition was well timed. The current ships were well past their sell-by dates and support and maintenance costs were unacceptable. The Royal Navy urgently needed replacement vessels and were very supportive of a scheme which provided a cheaper solution in very short time scales. The long-term support risks for these relatively cheap and cheerful ships was retained by the contractor, further increasing the appeal of this option. There were other factors too. SMART Acquisition had recently been introduced and senior management in the MoD were keen to demonstrate a significant early win. The OPV proposal, which was highly innovative, was an excellent opportunity to show the benefits of Smart Acquisition and was keenly supported at all senior levels. Finally, VT was threatening to make workers redundant because of the scarcity of orders in the short term, before T45 work came on stream. There was therefore significant political pressure to place a contract as soon as possible. Therefore, at low financial risk, the MoD had the perfect opportunity to deliver a new capability quickly and innovatively with clear benefits all-round.

12 Result In first year of operation, the three River Class OPVs achieved 97.5% availability , compared to a maximum of 82% for the five Island Class they replaced. More capable – vessels are some 30% larger More fuel efficient Smaller crew – 30 (from pool of 45) compared to 35 on Island Class. Total RN Manpower: Island – 175 (5x35) River – 135 (3x45) The predicted benefits have successfully been delivered and the leasing arrangement has recently been extended. The three ships are delivering improved capability at lower cost, whilst manning levels have been significantly reduced.

13 Key Points Lease-based Availability Contract (CfA) most suited to relatively simple, commercially available technologies used in routine, predictable operations – normally second-line (OPV) rather than front-line (T45) capabilities. Incentivises company to perform to meet and exceed capability and availability targets. CfA most suited to well-defined capability requirements which do not cross many environmental boundaries and do not create significant DLoD coherence issues. Leasing may not always be the cheapest option, but does provide smooth, predictable budget requirements – risk is transferred to industry. At the risk of drawing too many conclusions from one example, the lease-based availability contract seems ideally suited to second-line military capabilities which operate on a routine and predictable operating cycle, as the OPV does around UK home waters. The company is incentivised to meet and exceed targets, aided by the fact that the straight forward capability delivered by the OPV is self contained. There is no need to manage complex interfaces across environmental boundaries or to ensure coherence across a range of complex Defence Lines of Development issues. Finally, although leasing may not be the cheapest way of delivering a defined capability, it does minimise risk for the customer and provides a smooth and predictable budget requirement.

14 Type 45 Destroyer Successor to Type 42 Destroyers
History of procurement delays: Type 43, 44 designs NATO Frigate Replacement (NFR90) Common New Generation Frigate (UK, France, Italy) Type 45 (UK) with tri-national PAAMS weapon system 8-years late, £1B over budget, 6 ships compared to original requirement of 12. The Type 45 Destroyer is a very different story. It has gone through four iterations of design – from UK-only, to NATO-wide, to a UK-French-Italian solution, and finally to a UK-unique ship, albeit with a tri-national weapon system. Depending on the baseline chosen, the ship is 8-years late into service, £1 Billion over budget, and with only 6 ships instead of the original 12 required. Nevertheless, the ship is highly capable.

15 Timeline 1999 – Type 45 established as Integrated Project Team in line with SMART Acquisition philosophy Complex procurement strategy: Work share between VT and BAE Systems on first 3 ships leading to effective competition on further batches VT and BAE Systems unable to agree risk sharing arrangements BAE Systems’ unsolicited bid for building all ships rejected. 2001 RAND study examined other procurement options. Final solution announced July 2001 – Batch production strategy, with different ship blocks constructed at different shipyards and assembled in one. 2004 – number of ships reduced to 8 2008 – number of ships reduced to 6 HMS Daring undergoing weapon trials – due to enter service Nov 2010 Sixth ship enters service 2013 The timeline here only shows key dates since the programme became UK-only. Many of the delays were accrued from 2000 through to about 2004, a period when the procurement strategy appeared to be under continuous review. The problem was compounded by the fact that the two main companies involved, BAE Systems and VT, found difficulty in working together during the early years of the project. The MoD, who had insufficient funds to build the 12 ships required, were unable to make a clear decision on the most cost-effective build strategy with options of a competitive approach, with the cost benefits that that could accrue, and a directed build strategy, where the benefits of experience could lead to reductions in build costs in the later ships. Further complexity was added by the need to assess knock-on impacts to other shipbuilding programmes and the long-term impact on UK shipbuilding as a whole, remembering that at this stage the Defence Industrial Strategy had not been published. To summarise a weighty RAND Report in one sentence; the benefits of the different build strategies were well balanced in terms of cost. Ultimately the MoD went for a compromise solution, with blocks constructed at different shipyards and then transported to the BAE Systems Yard on the Clyde in Scotland for assembly. Three ships are now undergoing trials and the last of class will enter service in 2013.

16 Key Points International collaboration on large scale, complex, high-tech programmes almost impossible to achieve. Cost increase due to: Delays in establishing a clear industrial and procurement strategy for the programme PAAMS weapon systems Increased ship build cost £200M to run on older Type 42 destroyers Programme has led to rationalisation of UK shipbuilding industry – highly influential RAND report: Competition v sole-source production – need to take into account factors other than cost. Block construction proving a success, but not without risk Learning curve effects are significant Man-hour savings of 43% predicted from first to last ship The Type 45 demonstrates the difficulty of achieving effective international collaboration on programmes of such complexity and scale. The simple act of delaying the programme whilst trying to establish the most cost-effective build strategy incurred significant costs in its own right, as a result of additional build costs and the high cost of running on older ships beyond their expected life. It is arguable that an earlier firm decision on the procurement strategy for this programme would have resulted in more ships being delivered earlier at lower cost. The RAND report has proved highly influential and led to policy for the maritime sector which was published in the Defence industrial Strategy and the subsequent rationalisation of the industry. The block construction process has proved successful, although not without risk, not least the inherent risk in ferrying large blocks of ships on barges around the UK coastline. Finally, the learning curve effects in shipbuilding are significant, with the programme likely to deliver man-hour savings of 43% from first to last ship.

17 Future Carrier- CVF Requirement for enhanced carrier capability identified in 1998 Strategic Defence Review. Studies favoured option of a large ship with STOVL aircraft as most cost-effective option. Aircraft and Infrastructure issues necessitated a programme approach – 2* Carrier Strike Senior Responsible Owner, as well as CVF IPT Turning now to the Future Carrier. The requirement for a carrier capability was confirmed in the 1998 Strategic Defence Review. Extensive studies confirmed that this should be delivered by a large ship carrying a STOVL type aircraft. In terms of delivery the carrier was seen as an integral element of a wider capability-based programme, named Carrier-Strike. This included the aircraft for the ships, infrastructure and training, as well as the phase out of existing capabilities. This wider programme is managed by a 2* Senior Responsible Owner

18 Timeline June 2001 – Joint Strike Fighter finally selected with knock–on effect to CVF programme. Nov 2001 – Assessment Phase contract awarded to Thales and BAE Systems Dec 2002 – CVF IPT concluded Thales proposal best. Costs similar. Jan 2003 – Prime Minister decides politically unacceptable to award contract outright to Thales. MoD proposes CVF Alliance MoD – partner and customer BAE Systems - Prime Contractor Thales – CVF Design Subsequent design and programme reviews to reduce cost – Budget £2.9B, Cost £3.8B Potential French involvement Mar 2007 – Treasury approval of £3.74B programme obtained. Max cost £3.9B July 2007 – Orders for 2 ships placed Work progressing rapidly (In-service dates now 2016 and 2018) but programme still uncertain until after General Election and subsequent Strategic Defence Review The timeline for Carrier Strike has been dominated by political and affordability issues. The original procurement strategy included a competitive assessment phase where the two competing contractors, Thales and BAE Systems produced designs for evaluation by the MoD customer. The MoD concluded that the Thales proposal was technically the best - with similar costs from both contractors the Thales proposal was the MoD’s preferred solution. However, Thales was perceived as French-owned and it was deemed politically unacceptable to award such a prestigious contract to an overseas company. Prime Minister Blair therefore vetoed the way ahead and asked for alternative proposals. Eventually a compromise solution was developed with BAE Systems as the Prime Contractor and Thales responsible for the technical design within an Alliance with the MoD as a partner and customer. The alliance took a long while to settle down to a workable arrangement, but is now proving effective. Affordability issues and the need to review the programme extensively to identify cost-savings has added considerable delay without identifying any significant costs savings, but some capabilities has been lost. Construction work is now proceeding well, although the programme is still susceptible to change, or even cancellation, resulting from the current dire financial circumstances of the Ministry of Defence or the Strategic Defence Review.

19 Key Points Political interference in project of this size inevitable.
Difficulties in getting competitors to subsequently work as Alliance partners. Design reviews to reduce costs only succeeded in delaying programme and incurring associated increased costs. Programme approach essential due to complex dependencies. Affordability v Capability issue may still result in programme cancellation. A few key points. Firstly, anybody who thinks that political interference should not happen in a project of this scale is being naïve. It is inevitable, and the associated delays and reviews need to be factored into the schedule. Secondly, it is also naïve to move smoothly from competition to partnership with the same people involved. Changing business behaviours is notoriously difficult and it is not surprising that it took some years to achieve effective working within the alliance. As for the Type 45, the seemingly endless need to review design and procurement strategies rarely seem to achieve much apart from delaying the programme and incurring additional costs. Strong leadership and firm decision making is required to control this tendency. Finally, although I haven’t had the opportunity here to develop the theme, the programme approach for a project of this complexity, with so many dependencies, is essential.

20 Leadership - Openness – Trust – Behaviours - Cultures
Conclusions Competition in UK warship building impossible to sustain with current naval requirement. Long-term partnering solution only way ahead if the Defence Industrial Strategy for the Maritime Sector is to be sustained. Government can’t take a hands-off approach as it tried to do in 80s and 90s Requires transparency and commitment on both sides. Value for Money obtained through partnering approach, innovation and continuous learning/improvement. Political interference inevitable. Project and programme teams must have the necessary skills. Innovative procurement strategies can be successful - a one size fits all approach is not appropriate Delays cost money, including additional costs of running on old systems. Earlier decision-making and commitment can lead to increased capability through affordability of greater numbers. Accident or Design So, to conclude. With a diminishing requirement for warship hulls from the Royal Navy, it is impossible to sustain a warship building infrastructure of sufficient size to underpin competition. The UK Defence Industrial Strategy is clear about the capabilities it wants to retain in the UK and partnering is the only solution if the strategy is to be sustained. The maritime sector is ahead of other defence industries in the UK in this respect. A high degree of openness and transparency is required and, after a difficult start, this now looks like it is being achieved. Long-term value for money is achieved through innovation and continuous learning. The Type 45 savings are starting to demonstrate this but there is still a long way to go. Political interference is inevitable and so programme managers must develop, amongst many other skills, the ability to manage stakeholders effectively. The UK has in the past taken a ‘one size fits all’ approach to procurement and support, but innovative procurement strategies, tailored to particular circumstances, are more promising. Delays cost money and it can be contended, although impossible to prove, that if firm leadership had resulted in earlier decisions and commitments then affordability issues might have been more effectively addressed. Is warship procurement in the UK accident or design – I think up to 2005 it was probably accident, resulting from pragmatic solutions to specific problems. With the Defence Industrial Strategy we are now seeing a long-term plan and commitment to produce a sustainable industry in the UK which can respond to the Navy’s capability requirements. My concern is whether or not the MoD has the resources to underpin the commitments that it has made. I could go on at length about many of these issues, but I think that that is probably an appropriate place to conclude. My final thought is that you can have the best acquisition processes in the world, but in the end it comes down to issues of leadership, behaviour and culture. Thank you. Leadership - Openness – Trust – Behaviours - Cultures

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