1 The Ministry of Defence (the Department) faces significant financial problems in balancing its budget. In 2010, it announced that it had a funding gap of £38 billion over the next 10 years. In addition, the 2010 Spending Review required the Department to make spending cuts of some 7.5 per cent in real terms (£2.7 billion) by 2014-15 as part of efforts to reduce the deficit across all government departments.
2 In October 2010, the Strategic Defence and Security Review set out measures for the Department to balance its budget, which included cutting non-front line costs by an estimated £4.3 billion by 2015. The Defence budget has a relatively high level of fixed costs in the short term and a significant amount of procurement and equipment expenditure is committed for years in advance. The consequence is that the Department has relatively little flexibility to reduce spending in some areas of its budget.
3 Personnel costs comprise over one-third of the budget and are more flexible in the medium and long term. As a result, a large part of the savings the Department needs to make under the Strategic Defence and Security Review will come from reducing headcount. The Review announced that the Department would cut its civilian workforce by around 25,000; and the military by around 17,000. In spring 2011, the Department conducted a subsequent exercise to identify further cost savings, known as the three month exercise. This exercise reduced the workforce further, the revised total reductions are: 29,000 in the civilian workforce (34 per cent) to 57,000 personnel and 25,000 (14 per cent) in the military, namely through further reductions in the Army, by 2015, to 152,000 personnel: a total of 54,000 headcount reductions.
4 The Department estimates that reducing headcount will cut its costs by £4.1 billion between 2011-12 and 2014-15. This is based on the reductions set out in the Strategic Defence and Security Review and does not include the additional reductions in headcount required by the three month exercise which the Department has not yet finalized. The Department has not yet published any revisions to the amount it expects to save from the Strategic Defence and Security Review overall.
5 To meet its headcount reduction targets, the Department has started a redundancy programme and a Voluntary Early Release Scheme, both of which run in several tranches. These aim to reduce the Defence workforce by around 23,000 civilian and military personnel. At least 16,000 (30 per cent of the total reductions required) will leave through natural wastage and approximately 1,700 personnel transferred to the private sector. These figures are likely to change depending on levels of natural wastage and changes in planning. Defence Trading Funds are expected to reduce headcount by 4,400, however, as they are undertaking this work separately from the Department we have not included their actions in this report. The Department has not yet determined in detail how it will reduce the Army headcount further by the 5,000 required by the three month exercise but expects it will be through a mixture of redundancies and natural wastage. The Department has not reduced its headcount on this scale since the 1990's 'Options for Change'.
6 A number of cost savings were announced in the Strategic Defence and Security Review such as the early removal from service of some 'force elements' of the Armed Forces, such as the Harrier feet. The numbers of military personnel associated with these 'force elements' are relatively clear and the Department understands the consequences of the reduction. The relationship between personnel numbers and the Department's other activities is less clear. The Department needs to determine how it will transform the way it works in order to deliver Defence's strategic objectives as its personnel decreases.
7 The Department is developing a new operating model which will set out how Defence will work in order to meet its purpose of defending the United Kingdom and its Overseas Territories, citizens and interests and helping to strengthen international peace and security. By changing the way Defence operates, the Department is seeking to ensure it can continue to meet its objectives with fewer people. The high level structure of this model has now been determined and the Department is now working on the detail that will be needed to implement these new ways of working. The Department currently has a portfolio of some 47 initiatives to transform various elements of its business.
8 The Department has had little choice other than to make cost cuts early if it is to meet spending review targets. Consequently, it has commenced reducing its headcount before the full detail of the new operating model has been determined. Recognising the risk inherent in this approach, the Department has taken steps to retain skills in line with the requirements of the new model as much as it can predict and is feasible. There remains a risk, however, that some of the skills it needs now and in the future may be lost.
9 This report examines how effectively the Department is managing workforce changes without impacting negatively on the delivery of its strategic objectives given the speed of the reductions. It builds on earlier National Audit Office work that reported on how government departments are making cost reductions, while focusing on workforce change. This report will also consider some of the steps the Department has taken to limit the loss of some specific skills. Our study methods, undertaken in the second half of 2011, are outlined in Appendix One.