MOD GoCo – further thoughts on why market interest fell away

We wrote here about the UK Ministry of Defence's decision not to proceed with the potential GoCo (Government-owned, Contractor operated) structure for Defence Equipment and Support (DE&S) after only one bidder was left in the field.

Speculating further about why the other consortia pulled out and why this did not prove to be an attractive proposition for the market, we should go back to the original reasoning behind the GoCo idea.

We quoted from Bernard Gray’s original report in part 1- the goal that GoCo would

also clarify the interfaces between DE&S, industry, the Requirements community and the Front Line Command military users. This arrangement would force each of the participants to formalise and cost significant changes to requirements or timescale.”

So ‘contractualising’ the relationship between the commercial arm of MOD (the GoCo in the new world) and the budget holders / specifiers would stop some of the practices that have traditionally led to cost and time overruns. In the past, the design for a warship or plane would change regularly, for years after the initial contract was awarded. That would be driven by the services (people in uniforms) and by politicians. Every change would require the commercial people to re-negotiate with the suppliers, leading to the inevitable cost / timing increases.

Bernard Gray thought that by creating the GoCo, these changes would be put onto a proper commercial basis. So Bechtel (or whoever) would not just roll over when the Minister or General demanded a change – they would cost it properly and then require a properly documented sign-off, laying out just how much the whim of the politician or the well-intentioned specification improvement of the General was costing. That would, Gray felt, get the whole process onto a better footing.

Secondly, the GoCo would enable MOD to have better paid, and presumably higher skilled, people working on their behalf to face off against the giant defence contractors. That capability – finance, procurement, programme management - would reduce costs both at initial negotiation stage and through the programmes.

Now as we know, the collapse of the concept has come from suppliers withdrawing rather than the MOD killing the idea.  And whilst we mentioned in part 1 that recent pressure on government suppliers and margins may have been a contributing factor in the bidding consortia withdrawal,  I suspect the factor that ultimately made the GoCo not attractive enough was around risk transfer.

The GoCo contractor would need to be incentivised both to stand up to change requests from politicians et al, and to manage successfully all the processes within the GoCo scope. So that probably meant getting the GoCo to take some substantial risk themselves – the contractor would need to suffer if they lost grip through a procurement / construction cycle. That would need quite substantial risk transfer, in all likelihood, to sit as the converse of strong incentivisation for success.

That all sounds like quite a difficult challenge in terms of MOD drafting the potential contract with the GoCo, to get that balance right, and maybe the potential GoCo providers just saw it as too risky given the many, many things that can go wrong in a 10 year plus military construction type programme.

There is also the inherent instability of bidding consortia, particularly when I believe all of those shortlisted were formed purely for this purpose, rather than being long-established partners . You only need one significant party to get cold feet to call the whole thing into question. So if we start adding up all of these factors, it’s perhaps not surprising that we ended up with just the one consortia – at which point, quite rightly, the Minister said that he could not proceed without competition.

Of course, the idea may come back around again – MOD have said they haven’t rejected the concept, just that they couldn’t proceed with only one bidder. So who knows – we may be looking at this again in 3 years time.

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Voices (2)

  1. Phoenix:

    Putting spec changes in complex MoD procurement projects on to a sensible, commercial footing, where cost and programme implications for each proposed change is clear to see? That sounds like a good idea. Recruiting talented, able staff and paying them rewards competitive with the commercial sector? Sounds like another reasonable idea. Just remind me why we need a GoCo to achieve those two fairly simple improvements?

    1. Biz:

      As I understand it Mr Gray is concerned about a couple of other things too:

      1. A divided loyalty in DE&S staff. That is, they are reliant on MoD centre for their ongoing careers and therefore are more likely to connive with the requirement setters in the ‘conspiracy of optimism that Gray outlined in his 2009 report. I’m not sure if this is true and it does sound rather dubious. Gray thinks that a GOCO will create a complete separation between the groups and disrupt this suggested conflict of interests. I wonder if this could be proved.

      2. Gray also thinks that the GOCO is very difficult to undo and would therefore make the structural changes within MoD procurement near permanent. Fair enough, but that’s only a virtue if the plan works. Big outsourcing decisions will all have this factor within it, but it’s usually seen as a risk rather than an advantage.

      I have a feeling that GOCO, as an argument, is probably too finely balanced (if I were being charitable to the proposal) for it to be demonstrably the right thing to do. A lot of the thinking about it seems to be down to instinct rather than an overwhelming case. Is that enough to justify the huge risk involved in privatisation? Probably not, when there are other things that can be done.

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