Outsourcing MOD Procurement by Colin Cram

Editor’s Note: With the recent NOGO-GOCO decision (at least for the next year) by the UK Government regarding a proposal to outsource the Ministry of Defence procurement function by way of a government owned – contractor operated model, the following August 2012 commentary from Colin Cram is worth revisiting.

There is no perfect model for MoD procurement, but the present organisation does not meet requirements. A GOCO, unfettered by MoD bureaucracy and accountable through a well-drawn and managed contract, could be the solution, says Colin Cram

There was bound to be something of an outcry against the proposal to outsource Ministry of Defence procurement into a GOCO (government-owned, contractor-operated) body. However, none of the critics seem to have proposed an alternative, other than the status quo. Also, there seems to have been a lack of rational explanations as to why the proposal should be riskier than any other option, other than the argument that, “if the MOD is so poor at negotiating contracts, how will it be able to negotiate a satisfactory outsourcing of its procurement?”.

Outsourcing of procurement is not new for the UK public sector. The Government Procurement Service (GPS), which hopes to be able to capture the bulk of the £13bn of procurement spend that is common to central government departments – plus a good chunk of the spend that is common to other parts of the public sector – is in effect a government-owned outsourced provider. The NHS uses the GPS, two private sector-owned outsourced providers – Supply Chain (owned by EDS) and Health Trust Europe and one jointly owned by the NHS and private sector, NHS Shared Business Services. While the savings have not been on the scale hoped for, much of this can be put down to lack of discipline within the NHS. The research councils outsourced their procurement to a separate body in 2002, the Research Councils Procurement Organisation, and had it not been for an ill-conceived investment in IT within the past five years, the savings would have been very large – as indicated in a recent National Audit Office report.

The widespread use of purchasing consortia – normally, but not always, owned by public sector bodies – is a further example of outsourced procurement. Furthermore, the large scale outsourcing of services by the public sector inevitably outsources the procurement which supports those services.

Outsourcing of military parts and equipment is not new to the Ministry of Defence. Thirty years ago I took part in a review of the supply of Ministry of Defence spares. Stocks of MOD spares were held at repair contractors’ premises. However, the re-ordering was done by the contractors, who were deciding what to procure and how much. The spend was several hundred million pounds a year, which could translate nowadays into £1bn plus – a pretty significant outsourcing.

So, why might outsourcing procurement to a GOCO or a procurement agency be better than what exists at present? There would be a clear specification of the service to be delivered and, hopefully, suitable monitoring arrangements. This would compel the MOD to work out exactly what service it genuinely required in order to meet a defined level of training and combat readiness. It would impose a discipline on politicians and senior MOD personnel as the cost implications of every significant decision would become apparent – hence improving accountability.

It would impose a further discipline on MOD personnel to prevent unauthorised or ill-conceived discussions with equipment contractors or potential contractors that could undermine the ability of a GOCO or procurement agency to act independently and secure value for money though sourcing from the most appropriate suppliers. Such behind-the-scene discussions are the bane of all public sector procurement professionals, not just MOD personnel.

A further discipline would be that use of procurement arrangements let and managed by the GOCO would be mandatory, thus maximising its procurement power. Also, an outsourced procurement organisation would be expected to streamline the procurement decision making and processes – something that should enable the MOD and contractors to reduce stockholdings and work in progress.

So why a GOCO rather than a procurement agency? A GOCO would not be restricted by civil service and military terms and conditions of employment. It would thus have much greater flexibility to deliver a first class procurement service.

What might be the downsides to outsourcing? First, changes in government policies might be difficult to implement. When the present administration first came to power, delivering savings through procurement was the war cry. Now the emphasis seems to be shifting to using public sector procurement to support economic growth. The UK defence industry is the second largest defence equipment exporter in the world and a major UK employer. It could be argued that this has been achieved through its relationship with the Ministry of Defence.

Second, technical personnel and users are critical to ensuring that the MOD gets the right equipment and in the right quantities for specific training and operational requirements. It would be impracticable and unwise to try to exclude them from discussions with industry, but their objectives might be rather different from those of an outsourced procurement organisation. More generally, one could argue that direct engagement between the MOD and industry forms a backbone of defence.

Third, it may be that the people with the expertise to do the procurement are the same as at present – but who would demand higher salaries. The task for the management of the outsourced procurement organisation would be to harness this expertise in new ways and drive up productivity.

So who might run a GOCO? There would be a huge conflict of interest if it was an MOD contractor or potential one. The oil industry would be able to provide some of the expertise required; it is used to dealing with leading edge projects. However, the expertise required might change as any outsourcing progressed. It would make sense to start off with the simplest and least critical procurements and graduate to the most complex ones on the way to a total outsourcing. Finding an organisation that could embrace this degree of change would not be easy.

To conclude, MOD procurement has come under criticism for many years. There is no perfect model, but the present organisation does not meet requirements. A GOCO, unfettered by MOD bureaucracy and accountable through a well-drawn and managed contract, could release some of the pent up energy and innovation that exists within MOD procurement. Incremental and careful – yet determined – implementation will be necessary to protect operational effectiveness, national security and the exporting capability of the UK defence industry.