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It seems that for almost as long as anyone can remember, the UK Ministry of Defence (MoD) has had a variable

track record when it comes to ensuring value for money for the British taxpayer. This is especially so with regard to the procurement of equipment and services, as well as the support of said equipment while in service (the complete process of which is now termed acquisition).

This history has seen its fair share of reports1 as well as attempts at reforming both the processes2 and structures responsible.3 The global financial crisis of 2008 and the ensuing recession, resulted in an urgent need to control the UK’s public spending and budget deficit, which has meant cuts to the budgets of most government departments, the MoD included. With reform of the MoD and restructuring of the armed forces underway, this article looks at an important component of that change—the proposals to reform DE&S (Defence Equipment & Support) and in particular, where the MoD stands with the government-owned, contractor-operated (GOCO) option.

Current defenCe environment and reforming the mod

The MoD needs to realise more than £4 billion worth of savings by 20154, a figure that has increased by around £875 million with the completion of the latest spending round.5 The need for major reform has meant that the MoD has undertaken a major transformation programme, underlined by a new defence vision as published in its recent business plan.6 This resulted in a transformation package consisting of a portfolio of 37 programmes with an additional 10 deliverables split into tiers—tier one (the most critical programmes overseen by the Defence Operating Board (Transformation) (DOB (T)), which includes the 2nd permanent undersecretary,

the vice chief of the defence staff and director general, finance7), tier two (other change

programmes), and tier three (other security and defence commitments).

There has been an emphasis on cutting non-frontline costs as well as short-term cost reduction. Given that the defence budget has a relatively high level of fixed costs in the short term and a significant proportion (in both operational expenditure and procurement terms) is committed years in advance, the MoD is left with relatively little

room for manoeuvre when it comes to reducing its spending. This has meant that a large proportion of its savings is coming from reductions in personnel numbers, which accounts for about a third of the entire budget.

The figures in the SDSR (Strategic Defence and Security Review) were revised upwards in the spring of 2011 to 29,000 civilians (34% of the total) and 25,000 military (14% of the total).8 Given that the MoD is still developing the details associated with Lord Levene’s new Defence Operating Model (despite being introduced in December 20119), the reductions in personnel numbers will have been largely completed by the time the final details have been worked out, which means that these reductions will have been put into effect while it is still unclear as to what exactly the MoD’s requirement will be in terms of its workforce, composition and skillset. There is thus the danger of a significant skills gap developing, something that may force the MoD to become even more reliant on external expertise.10

need to reform de&S and optionS for reformThe proposals to reform DE&S were an important part of

the Levene Report11 but also build upon what was said in both the Defence Materiel Strategy12 and the Gray Report.13 While some progress has already been made14, there is still work to

Reforming DE&S And The GOCO OptionPeter Antill And Pete ito of the Centre for defenCe ACquisition At CrAnfield university, defenCe ACAdemy uK, outline the oPtions for reform of defenCe ACquisition in the uK, And why Allies Are wAtChing with interest.

(Crown Copyright harland Quarrington)

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be done. With the average cost and time overruns in defence projects being 40% on cost and 80% on time, analysis identified the three underlying causes to be firstly, the overheated programme; secondly, a weak interface between DE&S and the wider MoD resulting in poor discipline and change control; and thirdly, insufficient levels of business capability in DE&S for the size and complexity of the programmes it was asked to deliver (a shortage of commercial skills). Therefore, in December 2011, ministers were presented with three options for the restructuring of DE&S, which were:15

• A trading fund (TF);• An executive, non-departmental public body with a strategic

partner (ENDPB/SP); and• A government-owned, contractor-operated (GOCO) entity.

However, over time, this changed. In May 2013, Secretary of State for Defence Philip Hammond announced that an assessment will be undertaken regarding the two models for DE&S which are under consideration: 1) A private sector led GOCO Model and 2) “DE&S+”, which would be a fully-funded, restructured version of the existing DE&S, which would remain a public sector entity.

The assessment phase will last for approximately 12 months. The MoD has noted that during this period, there will be coordination with Treasury and the Cabinet Office to examine the possible outcomes of DE&S+. At the same time, a commercial competition will be initiated to assess how a GOCO would work in practice. Hammond emphasised that there would be an objective assessment of the two options, stating that: “No decisions have yet been made. At the end of this 12-month assessment phase we will have a comprehensive set of qualitative and quantitative data for both possible operating models, which will enable us critically to evaluate the two options and make a final decision about the future of DE&S.”16

However, it is notable that the 2013 MoD statement contains

the comment that in July 2012, the GOCO model was already provisionally announced as the preferred option with regard to transforming DE&S. This, despite significant questions still being raised about how exactly it would operate and how it would report17 with one commentator saying, “Think about the political gamble here: The defence secretary, Philip Hammond, and [George] Osborne are willing to let one of the most sensitive aspects of national security be run by business, most likely overseas behemoths. This is extraordinary—even more so if this unparalleled, globally unproven idea actually works.”18

Indeed, Hammond conceded in the 2013 announcement that, “We have made no secret of our expectation that the GOCO option is likely to prove better value for money, but we need to test this assumption with the market, to see what can be delivered and at what cost.”19

the White paperThe MoD subsequently issued a White Paper in June

2013.20 In the foreword, Hammond notes that the paper sets out proposals for two changes, the first of which is creating a new GOCO operating model “to manage the procurement and support of defence equipment by the Defence Equipment and Support organisation as the agent of the MoD, subject to demonstrating affordability and value for money.”21 Hammond asserts that such a step would bring in “incentivised private sector expertise” to improve the MoD’s acquisition process by introducing systems and procedures “that provide staff with the best access to the necessary skills, processes and tools to enable them to do their jobs better,” which will drive “value for money in equipment projects”.22 The second change cited by Hammond is “a new statutory framework to ensure transparency and to encourage efficiency in single-source procurement contracts”.23

With regard to the GOCO option, despite comments by Hammond in May 2013 that no decision has been made, the White Paper notes that, “Analysis carried out to date suggests

dE&S at abbEy wood: two modElS for rEform of thE organiSation arE undEr ConSidEration (Crown Copyright andrEw linnEtt)

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that the establishment of a ‘GOCO’ operating model would realise significant benefits over those that could be achieved from a wholly public sector model for reform of DE&S”.24 It then outlines the specific steps to be followed: “The MoD is proposing to introduce the GOCO model, by letting a contract with a private sector contracting entity. The contracting entity will operate on behalf of the MoD a limited company (the operating company) into which certain services currently being provided by DE&S will be transferred, together with the employees providing those services. The government would own a special share in the operating company on national security grounds. On expiry or termination of the contract, the operating company would either transfer to a new company or revert back to the MoD.”25

The MoD case for the GOCO option is clearly made, noting that the MoD currently believes “that a GOCO operating model offers the greatest likelihood of focused and sustained improvement, and that it will deliver the strongest incentives for culture change, productivity enhancement and reduced operating costs over time”.26 Assuming that affordability and value for money concerns are met, the MoD proposes to award a contract of up to nine years, subject to performance in transition, transformation and delivery.27

Under the proposal, the MoD would have the GOCO “operate as its agent, allowing the GOCO to negotiate and sign new contracts on behalf of the Secretary of State as the principal”28 and “the defence acquisition programme costs (more than 90% of the current DE&S budget) would be paid

directly from the MoD to the suppliers following verification and validation by the operating company, and therefore would not flow through the GOCO”.29

The MoD will remain the approval authority for all projects with auditing conducted by the comptroller and auditor general. The GOCO would have to act in accordance with the Government Financial Reporting Manual with regard to all transactions involving MoD approved projects and “will also be required to support the MoD in their obligation to comply with the government’s policy on disclosure and transparency of voted funds”.30

The MoD’s belief in the GOCO model is clearly expressed in its commentary: “The hard contractual boundary between MoD and the GOCO with clearly defined accountabilities and responsibilities underpinned by a rigorous change control process, together with an incentivisation regime, will drive effectiveness, efficiency and innovation as well as developing the capability to provide full transparency of ‘cost’ information to the MoD. Taken together, these measures will get to the underlying causes of the problems in defence acquisition that we are trying to address.”31

relevant national audit offiCe CommentaryWhile the National Audit Office (NAO) has not provided

a detailed analysis yet on the GOCO issue, it has provided two pieces of analysis relevant to the GOCO vs. DE&S+ discussion. As previously mentioned, the NAO examined the question of the impact of the significant reductions being

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implemented in the MoD workforce.32 With deep cuts in both civilian and military by 2015,33 the NAO has noted that: “The department will need to profoundly change how it works to ensure it can deliver its strategic objectives with fewer staff,” adding that, “without real changes to ways of working, cutting headcount is likely to result in the department either doing less with fewer people or trying to do the same with greater risk”.34 Such commentary from the NAO would buttress the case for a reform programme as dramatic as turning DE&S into a GOCO.

However, a second NAO analysis on a defence acquisition issue illustrates the significance of ensuring that there is a robust assessment phase of GOCO vs. DE&S+. It evaluated the 2010 decision by the government to acquire the F-35 carrier version as opposed to the F-35 short take-off and vertical landing (STOVL) version selected by the previous government, and then the 2012 decision of the government to revert back to acquiring the STOVL version. The NAO makes the telling judgment that, “The October 2010 decision was based on immature data and a number of flawed assumptions, partly because the department decided not to involve commercial and industrial partners in the process”.35 The NAO emphasis on evidence-based decision-making is apparent in its analysis of the F-35 decision and reinforces the need to ensure that an objective analysis is provided in the assessment phase to judge if a GOCO really will provide the benefits put forward by the MoD.

This is of particular significance, as a number of critical issues will need to be addressed in determining whether GOCO is indeed the best future option for the MoD. A RUSI (Royal United Services Institute) paper cites numerous questions to be considered with regard to the operation of a GOCO, three of which stand out as having particular significance. First, how would a private sector entity handle UK involvement in international projects? As noted below, consideration of this option has generated concerns among partner states. Second, what exactly are the financial risks, which the private sector entity would be asked to assume? In light of the level and different types of uncertainty involved with defence acquisition projects, which areas and levels of risk would be accepted by the private sector entity, and how

much would remain with the MoD? This leads to the third question, which is simply, how much will the MoD have to pay a private sector entity to assume those risks?36

uS and allied intereStSFinally, despite the delay to a final decision until early 2014,

the fact that the GOCO option is still the favoured option out of the two still being considered, has led to some alarm bells ringing in not only Washington D.C.37 but among a number of other allies as well.38 A US Department of Defence spokesman is reported to have told the Financial Times that they “have some concerns over an option that would put contractors in roles normally filled by government employees and the effects this would have on ongoing and future cooperation”.39 Australia has reportedly put cooperation with the UK “on watch” and Canada is said to be keeping a close eye on developments.40

ConCluSionEven with the most recent revelation of possible conflicts of

interest between the potential bidding consortia and the MoD casting even more doubt on the projected reform of DE&S,41 if the MoD adopts the GOCO option, it will be instituting a reform of a magnitude, which has never before been attempted by any defence establishment. It is therefore critical that the assessment phase will indeed provide a thorough analysis of the benefits and risks inherent in the GOCO option, and the extent to which DE&S+ would be able to meet the challenges facing the MoD. Particularly, for such a critical question, it is essential to ensure that whatever decision is made, it is based on solid evidence. n

aBout the authorSPeter Antill rejoined Cranfield University in June 2009 to

undertake research in order to create a defence acquisition body of knowledge as well as several projects aiming to produce a continuous stream of publications over the longer term. This has included various books, journal articles, case studies, conference papers, monographs and chapters in edited publications as well as updating teaching material used by the Centre for Defence Acquisition. Peter graduated from Staffordshire University in 1993 with a BA (Hons) International Relations and followed that with an MSc Strategic Studies from Aberystwyth in 1995 and a PGCE (Post-Compulsory Education) from Oxford Brookes in 2005.

Since September 2008, Pete Ito has served as a lecturer and researcher in defence acquisition. He manages the Financial and Military Capability Management Through Life Capability Management (Advanced) Course, is the academic lead for the delivery of the Acquisition Employment Training Course and lectures on the Defence Acquisition Management MSc. After earning a Bachelor’s Degree in Political Science from the University of California at Berkeley, and a Juris Doctor (Law) Degree and a Masters Degree in International Affairs from George Washington University in Washington, D.C., Pete worked for 25 years as a foreign service officer for the US State Department. His primary focus was political affairs, particularly defence and security policy.

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He served as the head of the political-military affairs section in Berlin, as counsellor for political and economic affairs in Copenhagen and as the deputy permanent representative for the US delegation to the Organisation for the Prohibition of Chemical Weapons located in The Hague. He joined Cranfield University in September 2007.

referenCeS1 See for example: National Audit Office. (2013) Ministry of Defence - Major

Projects Report 2012, HC684, 10 January 2013, at http://www.nao.org.uk/report/ministry-of-defence-the-major-projects-report-2012/ as of 4 July 2013; House of Commons Defence Committee. (2013) Defence Acquisition, HC9, 5 February 2013, currently located at http://www.publications.parliament.uk/pa/cm201213/cmselect/cmdfence/9/9.pdf as of 4 July 2013; Gray, B. (2009) Review of Acquisition for the Secretary of State for Defence - An Independent Report, October 2009, at http://www.bipsolutions.com/docstore/ReviewAcquisitionGrayreport.pdf as of 3 July 2013; HM Government. (2010) Securing Britain in an Age of Uncertainty: The Strategic Defence and Security Review, Cm7948, October 2010, available here: https://www.gov.uk/government/publications/the-strategic-defence-and-security-review-securing-britain-in-an-age-of-uncertainty as of 3 July 2013; Lord Levene. (2011) Defence Reform: An Independent Report into the Structure and Management of the Ministry of Defence, June 2011, located at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/27408/defence_reform_report_struct_mgt_MoD_27june2011.pdf as of 3 July 2013.

2 For example, the Downey Cycle of 1968, the Levene Reforms of 1985, Smart Procurement in 1998, through to today’s emphasis on Capability Management. Op Cit. Gray, p. 239.

3 This includes the creation of the Procurement Executive (PE) in 1971, the Defence Procurement Agency (DPA) and Defence Logistics Organisation (DLO) in 1999, through to the creation of Defence Equipment and Support (DE&S) in 2007.

4 Chalmers, M. (2013) Mid-Term Blues - Defence and the 2013 Spending Review, RUSI Briefing Paper, February 2013, at http://www.rusi.org/downloads/assets/Briefing_Mid_Term_Blues.pdf as of 3 July 2013.

5 Chalmers, M. (2013) Respite from the Storm? Defence and the 2013 Spending Review Outcome, 28 June 2013, available at http://www.rusi.org/analysis/commentary/ref:C51CD74A8B34FD/ as of 3 July 2013.

6 Ministry of Defence. (2012) Business Plan 2012-2015, 31 May 2012, located at http://www.MoD.uk/NR/rdonlyres/21363C3C-5452-435D-9D6C-7B73069B6E27/0/MoD_plan_final_11_06_12_P1.pdf, as of 3 July 2013.

7 National Audit Office (2012) Reforming the Ministry of Defence, Briefing for the Committee of Public Accounts, February 2012, at http://www.nao.org/publications/1213/reforming_the_mod.aspx, p. 8, as of 16 August 2013.

8 National Audit Office. (2012) Ministry of Defence: Managing Change in the Defence Workforce, HC1791, February 2012, at http://www.nao.org.uk/publications/1012/defence_workforce.aspx as of 4 July 2013, p. 5.

9 Ministry of Defence. (2011) Defence Reform - Blueprint for the Future Department, 16 December 2011, located at https://whitehall-frontend-production.s3.amazonaws.com/system/uploads/attachment/file/425/85_20111216_Departmental_Blueprint_Dec_11_final_for_circulation-U.pdf as of 4 July 2013.

10 House of Commons Committee of Public Accounts. (2012) Ministry of Defence: Managing Change in the Defence Workforce, HC1905, currently located at http://www.publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1905/1905.pdf as of 4 July 2013, pp. 3 - 5.

11 Op Cit. Lord Levene, 2011, pp. 50 - 52.12 Ministry of Defence. (2011) ‘New Defence Materiel Strategy

Announced’, Defence Policy and Business News, dated 31 May 2011 and located at http://www.MoD.uk/DefenceInternet/DefenceNews/DefencePolicyAndBusiness/NewDefenceMaterielStrategyAnnounced.htm as of 4 July 2013. For an update, see Hammond, Rt Hon Philip. (2012)

Defence Materiel Strategy Update, dated 17 July 2012, located at http://www.parliament.uk/documents/commons-vote-office/July_2012/17-07-12/10-Defence-Material-Strategy-Update.pdf as of 4 July 2014.

13 Op Cit. Gray, 2009.14 For example, the Chief of Defence Materiel (CDM) is now a member of

the new Defence Board, having the lead for commercial and industrial policy across defence and independent costings from the Cost Assurance and Analysis Service (CAAS) are now mandatory in the Deputy Chief of Defence Staff (Capability) area - DCDS (Cap). This will be extended to the Frontline Commands under the broader reform of financial management.

15 House of Commons Defence Committee. (2012) Defence Acquisition: Written Evidence from the Ministry of Defence, DAQ001, dated 21 May 2012, located at http://www.publications.parliament.uk/pa/cm201213/cmselect/cmdfence/writev/acquisition/m01.htm as of 4 July 2013.

16 Defence Contracts Online. (2013) ‘Assessment Phase Begins: GOCO or DE&S+’, dated 13 May 2013, at http://www.contracts.MoD.uk/assessment-phase-begins-GOCO-or-des/ as of 9 July 2013.

17 Pannu, Amman. (2012) ‘How would GOCO procurement work in practice?’, defencemanagement.com, dated 17 August 2012, located at http://www.defencemanagement.com/feature_story.asp?id=20517 as of 4 July 2013; RUSI Acquisition Focus Group. (2012) ‘The Defence Material Strategy and the GOCO Proposal for Abbey Wood’, July 2012, at http://www.rusi.org/downloads/assets/GOCO_Briefing.pdf as of 9 July 2013.

18 Leftly, M. (2013) ‘Mark Leftly: Osbornism - one small step for the man, one giant leap for the economy . . . ideally’ in The Independent, dated 27 June 2013, currently located at http://www.independent.co.uk/news/business/comment/mark-leftly-osbornism--one-small-step-for-the-man-one-giant-leap-for-the-economy-ideally-8675821.html as of 12 July 2013.

19 Op Cit. Defence Contracts Online, 13 May 2013.20 Ministry of Defence. (2013) Better Defence Acquisition - Improving How We

Procure and Support Defence Equipment, Cm8626, June 2013, currently located at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206032/20130610_WP_Better_Def_Acquisition_screen_final.pdf as of 9 July 2013.

21 Ibid. pp. 4-5.22 Ibid. p. 5.23 Ibid.24 Ibid. p. 6.25 Ibid.26 Ibid. p. 7.27 Ibid.28 Ibid.29 Ibid.30 Ibid.31 Ibid.32 Op Cit. NAO, February 2012.33 Ibid. p. 4.34 Ibid. p. 8.35 National Audit Office. (2013) Carrier Strike: The 2012 Reversion Decision,

HC63, 10 May 2013, located at http://www.nao.org.uk/report/carrier-strike-the-2012-reversion-decision/ as of 9 July 2013, p. 6.

36 Op Cit. RUSI Acquisition Focus Group, July 2012, p. 3.37 ‘Pentagon “worried” by MoD plan to outsource procurement’, Defence

Management website, 9 May 2013, at http://www.defencemanagement.com/news_story.asp?id=22893 as of 4 July 2013.

38 Crosby, M. (2013) ‘Privatising defence organisation may harm UK foreign relationships’, DCI Contracts website, 15 May 2013, at http://www.dcicontracts.com/DCIblog/2013/05/15/privatising-defence-organisation-may-harm-uk-foreign-relationships/ as of 4 July 2013.

39 Op Cit. Defence Management website, 9 May 2013.40 Op Cit. Crosby, 15 May 2013.41 Leftly, M. (2013) ‘Ministry of Defence shake-up in chaos over conflicts

of interest’ in The Independent, dated 21 July 2013, at http://www.independent.co.uk/news/uk/home-news/ministry-of-defence-shakeup-in-chaos-over-conflicts-of-interest-8723165.html as of 25 July 2013.