The Nimrod Review - Official Documents

McKinsey Report on Procurement
Chapter 13 – Cuts, Change, Dilution and Distraction (1998-2006)
13.9 As set out in Chapter 12, McKinsey & Co (McKinsey) was engaged by the MOD in December 1997 to review
military acquisition in the light of the “serious failings” in the process of developing and purchasing major
military systems in the United Kingdom. 6 McKinsey was asked to undertake a review of the Procurement
Executive with two objectives: to diagnose the underlying weaknesses in the present Procurement process
and organisation; and to develop and cost alternative ‘models’ which would, if fully implemented, lead to a
significant improvement in performance of the overall system as measured by though life programme costs,
in-service dates and performance requirements. 7 In its report dated February 1998 entitled Transforming the
UK’s Procurement System, McKinsey made seven main recommendations for the organisational change of
Procurement, including a revised ‘front-end’ process, the establishment of Integrated Project Teams (IPTs) and
powerful industry incentives. McKinsey estimated the benefits of its recommendations to amount to: (a) a
reduction in procurement time of 30-45%; (b) a saving of 30% on through life costs; (c) £150-290 million
in annual savings through improved purchasing of parts and services; (d) £33-51 million annual savings from
specific improvements in the purchase of non-operational common-use items; and (e) £35-50 million annual
savings from a 20% reduction in the operating costs of the Procurement function. It is little wonder that
McKinsey’s Report was greeted with enthusiasm in certain quarters, and its recommendations accepted and
made a central part of the SDR programme. Some of the recommendations and tenets migrated across to
Logistics and In-Service Support.
Change driven by cost considerations
13.10
The desire to achieve cost reductions across Defence was a major driver behind the 1998 SDR:
“We are determined to make every pound spend on defence count. We instituted
a fundamental review of activities and assets as part of the Defence Review. This has
proved so successful that we have been able not only to provide for the enhancements
necessary to modernise the Armed Forces, but also to make a contribution towards wider
Government priorities. The Defence settlement will mean a reduction, in real terms, of
£500M in the first year, rising to nearly £700M in the third year, as the efficiencies begin
to take greater effect.” 8
13.11 As explained in Chapter 12, there was a belief that increased efficiencies and savings would come from: (i)
greater ‘project-orientated’ organisations, i.e. as opposed to ‘functionally-oriented’ organisations; (ii) greater
‘purple’, i.e. a move from single-service to tri-service organisations; and (iii) greater ‘through-life’ management
of platforms, i.e. throughout the whole CADMID cycle. 9
Organisational trauma
13.12
13.13
There were many valuable aspects to the 1998 SDR. Reform and rationalisation of Defence Procurement, in
particular, was long overdue. This Report is not intended to detract from the many achievements of the SDR
and its contribution to the improvement of Defence Procurement and In-Service Support.
In this Chapter, however, I wish to concentrate on and explain how the 1998 SDR was the start of a prolonged
period of deep organisational trauma in the MOD. This organisational trauma was brought about by a
combination of numerous sustained financial pressures (in the shape of ‘cuts’, ‘savings’, ‘efficiencies’, ‘strategic
targets’, ‘reduction in output costs’, ‘leaning’, etc.) which drove a cascade of multifarious organisational
changes (called variously ‘change’, ‘initiatives’, ‘change initiatives’, ‘transformation’, ‘re-energising’, etc.) and
which led to increasing organisational confusion, complexity, distraction and dilution. The Defence Logistics
Organisation (DLO) within the MOD, in particular, came under huge pressure. There was a shift in culture
and priorities towards ‘business’ and savings and efficiency targets, at the expense of functional values such
as safety and airworthiness. The primary focus of the DLO became delivering ‘change’ and the ‘change
programme’. There was a dilution of the safety and airworthiness regime and culture within the MOD.
6 Transforming the UK’s Procurement System, McKinsey & Co., 20 February 1998, page 1.
7 Transforming the UK’s Procurement System, McKinsey & Co., 20 February 1998, paragraph 2.2.
8 Making Every Penny Count, Appendix of supporting essays to SDR White Paper 1998.
9 (Concept, Assessment, Demonstration, Manufacture, In-service and Disposal, i.e. CADMID cycle)
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