1.15 The Materiel Strategy identified 14 different organisational structures that could potentially transform DE&S, to enhance its performance. Each option varied in how far it offered radical change.
1.16 In November 2011 DE&S's executive board14 shortlisted three options: a Trading fund;15 an executive non-departmental public body with a strategic partner (ENDPB/SP);16 and a government-owned, contractor-operated (GoCo) organisation.17 The Department assessed how closely each option would meet DE&S's business needs and the issues for implementing each option (Figure 2).
1.17 In July 2012 the Department selected to pursue a GoCo, to maximise the benefits of organisational change at DE&S (see Appendix Three). The GoCo proposition offered more than £1.6 billion in extra benefits over the other option - the ENDPB. Also, the Department developed a public sector comparator, known as DE&S plus (DE&S+), as a benchmark to measure GoCo bids and give a fall-back option should the competition to secure a GoCo fail.
Figure 2 DE&S executive board's assessment of shortlisted options for DE&S reform
Notes 1 Trading funds are public corporations, government-owned and operated. They must finance their operations from trading activity. 2 An ENDPB is a special-purpose body responsible for part of the process of government. Each has a sponsor department with general oversight of its activity. A strategic partner is a private sector company contracted to give business support. 3 Under a GoCo, the government would own the organisation's strategic direction but the GoCo would be operated on a for-profit basis by a private company accountable to its shareholders. Source: Materiel Strategy report to Defence Board in December 2011 |
1.18 Compared to other options, the Department recognised that there were higher risks with setting up the GoCo:
• The Department wanted a 9.5-year contract covering £100 billion of Departmental expenditure, which would make it the largest GoCo of its type globally.
• No single company could give all the business capabilities needed from a GoCo, and the Department expected companies to form into consortia to bid, limiting competition.
• Implementing a GoCo would be complex and require transferring elements of DE&S's business to head office and changes in the commands to ensure they had the capacity to work with the GoCo.
• The Department would need to identify and mitigate conflicts of interest between GoCo bidders and existing Departmental contracts.
• Other countries would need to agree that a GoCo could act as the Department's agent on sensitive defence contracts.
• A GoCo required significant Departmental financial investment, which increased the focus on getting a return on that investment. Internal scrutiny raised concerns that it would take between 8 and 9 years to make the financial savings needed to pay back the investment, compared to the GoCo's planned 9.5-year contract term.
1.19 In December 2013 the Department halted the GoCo proposal because of a lack of competition - it received one detailed bid from industry (see Appendix Three).18 Up to that date, the Department had spent £33 million on the Materiel Strategy, including £25 million on contractors and advisers. Despite this setback, there remained consensus that radical reform of DE&S was still necessary.
1.20 Building on the previous work in the Materiel Strategy to prepare for the GoCo and DE&S+, the Department announced in December 2013 that DE&S would become a bespoke trading entity (the entity) on 1 April 2014.19
1.21 Under this structure, DE&S remains within the public sector, although now as an arm's-length part of the Department, with its own board, chaired by a non-executive director. DE&S would then contract with the private sector for business support.
1.22 In Part Two we explore how the Department expects the bespoke trading entity to address each of DE&S's business needs. As well as the incremental changes secured to DE&S's capability in recent years alongside the Materiel Strategy.
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14 At the time the most senior leadership board in DE&S.
15 Trading funds are public corporations, government-owned and operated. They must finance their operations from trading activity.
16 An ENDPB is a special-purpose body responsible for part of the process of government. Each has a sponsor department with general oversight of its activity. A strategic partner is a private sector company contracted to give business support.
17 Under a GoCo, the government would own the organisation's strategic direction but the GoCo would be operated on a for-profit basis by a private company accountable to its shareholders.
18 The detailed stage was the second of three stages of bidding and required the consortia to provide a comprehensive response against all areas of the Department's requirements.
19 A concept made more explicit in HM Treasury, Managing Public Money, July 2013.