By Matt.Ross

09 Oct 2012

The Ministry of Defence’s new permanent secretary, Jon Thompson, tells Matt Ross how he intends to turn this most complex of Whitehall departments into a more professional operation – and dig it out of its financial hole

The Ministry of Defence is a very complex organisation in which to operate, says Jon Thompson, its new permanent secretary. “You’ve got to be able to live in a world of mixed cultures and inherent tensions; in a very, very large organisation which is quite complicated,” he explains. “And it’s not civil servants; we work with military colleagues. It’s a fusion of different cultures, because all three services have different cultures, too; so you’ve got to be able to work in quite a complicated cultural landscape.”

The management structure is equally nuanced. Thompson gestures to one wall of the meeting room where we’re talking, deep inside the ministry’s labyrinthian Whitehall HQ: “Next door is the office of the chief of defence staff,” he says. “Technically, the organisation has nine people of permanent secretary rank. I’m the permanent secretary, but there’s another civilian and seven military officers at this level. It’s a hybrid organisation where the chief of the defence staff has some military responsibilities; I have some military responsibilities as accounting officer; and we have some joint responsibilities that overlap. I think that’s unique.”

Within this multifaceted, multicultural structure, the MoD manages a large number of extremely difficult projects: a third of the schemes in the government’s major projects portfolio fall within its remit. “Building a nuclear reactor and putting it inside a submarine is not a straightforward thing to do, and you don’t do it very often,” says Thompson, noting that a nuclear sub contains two million moving parts. The scientific, engineering and technological work involved is often “incredibly difficult. It’s fantastically complicated – and I don’t think people necessarily appreciate that.”

That’s not the end of it, Thompson points out. Buying decisions have to take into account the importance of supporting the UK’s industrial base, and of retaining the military’s operational autonomy: “There are times when we need to protect our own sovereignty; to ensure that we fully understand how everything works, that we’re an independent nation. Sometimes it might be cheaper in cash terms to go overseas to buy something, but you need to think about the consequences for the UK long-term.”

What’s more, many projects are developed in partnership with other countries – presenting the MoD with yet another set of calculations and uncertainties. “The Typhoon [jet fighter], for example, is something we’re doing with three other countries in a consortium. That brings in additional complexity about how you meet everyone’s requirements,” he says. “The reality is that you can’t develop military air power on your own. The development costs alone are billions of pounds, so you have to spread them with some partners.”

Tripped up by complex landscape
Given these challenges, it’s not surprising that the MoD has struggled to manage its budgets and equipment purchases – but as Thompson acknowledges, many of its travails have been rooted in systemic problems. In 2009 a report commissioned from the former businessman, special adviser and journalist Bernard Gray found – as Thompson puts it – that project managers were habitually “over-optimistic about what things would cost and how quickly they could be delivered, in order to get them into the programme, and then we’d get new evidence and the cost would go up and the timescale would grow.” Projects were repeatedly deferred to push back spending, adding to their cost; and for 30 years the MoD failed to balance its budget – something that Thompson, speaking in July at Civil Service Live, attributed to a “lack of bravery to tackle the problem.” Ultimately, the gap between the MoD’s commitments and its predicted income over ten years grew to £38bn by mid-2010 – “then the spending review made it £63bn,” points out Thompson.

In recent years, the MoD has tackled the dynamics that got it into this hole. It’s working to drive down the cost of basic commodities through the Cabinet Office’s bulk-buying frameworks – “We’re an enormous user of energy, and we’ve led some of the way on that,” says Thompson – and recruiting more commercial specialists. Crucially, it’s also teamed up with consultancy KPMG to create a Cost Assurance Function able to assess and predict defence project costs and timescales. This is designed to give ministers and officials “an independent source of evidence as to whether what we’re being told [by suppliers and project leads] is broadly right,” says Thompson. It sounds remarkably like the Pricing Forecast Group that was, says the Prospect Union, wound down some time ago; at any rate, the MoD recognises the need for greater expertise in assessing and monitoring defence projects: “We’re deliberately saying that this is a fundamental issue for us: it needs more resource, and we’re putting more people into that area and bringing the best of the private sector into a strategic partnership,” he says.

Having improved its information on schemes’ likely prices and delivery dates, the ministry also needed to stiffen its readiness to decline or axe those which now look too expensive. This, says Thompson, was achieved in 2009 by taking the chairmanship of the Investment Approval Committee – the “primary decision-making body” on procurement matters – from the chief scientific adviser and passing it to the finance director (FD); who was then Thompson himself. “In 2010, for the first time, we turned projects down,” he says.

These developments have addressed the MoD’s main weaknesses, argues Thompson. “There were two significant issues that were missing in the past,” he says. “There wasn’t enough of a finance voice in the decision-making process; and there wasn’t enough of a voice about whether something could be delivered on time.” The strengthening of the FD, the recruitment of Gray as the chief of defence materiel, and the new Cost Assurance Function should prevent the MoD from digging more budgetary holes, Thompson believes.

The legacy problem
The MoD must still, however, get out of the hole created by its past errors. “The challenge for us is that there is a vast legacy of projects previously approved which are in manufacture, and we’ve been reviewing them and seeing whether they’re realistic or not,” says Thompson.

Some of these projects are far too advanced to be substantially changed. Later in the conversation I ask whether, tasked with building a new fast jet, Thompson would create something like the Typhoon project: an international scheme constantly compromised to distribute work between the partners and meet their different operational requirements. He laughs – and not quite in his usual comfortable way: “That’s a slightly unfair question,” he replies. “It’s one of those great legacy projects that other people decided on.”

Other schemes have been dramatically altered since the general election; and some of them subsequently altered again. The coalition performed an awkward U-turn, for example, on the type of jets planned for its new aircraft carrier. Here, though, Thompson expresses no doubts: “Ministers made the right decision on the basis of what we knew in 2010, and they changed it in 2012 when we had a more mature understanding [of the costs of the two options] – and that was also the right decision,” he says, pointing out that the original decision was always flagged as contingent on further analytical work.

He sounds less confident about some of the other elements of the 2010 Strategic Defence and Security Review (SDSR). Although Thompson praises the government for running a first-principles rethink of the UK’s security operations – and for promising to run them every five years in future – he doesn’t claim that the process was perfect. “It was done with a new government, in the middle of a financial crisis, in a new structure [incorporating a national security adviser and council], in a six month period,” he says. “I think it made broadly all the right choices, but as we learn more as time goes on, we’ll refine [the decision-making process] for the next SDSR.”

In particular, Thompson suggests that he wants to improve the evidence base on which ministers must make key decisions. The 2010 SDSR taught the MoD “some lessons about what kind of preparation you need to have and what does that require, and what’s the right kind of evidence that ministers need to consider in making judgements,” he says. “So in late 2012 we’ve already begun some of the preparation work for a post-election SDSR.” Strategy and finance staff are, he adds, already “thinking about what’s the right kind of evidence, what are the big choices, and there’s a programme of work that builds up to 2015.”

Defending services, attacking waste
The SDSR was made far tougher by the spending cuts, which have exacerbated the challenge of squeezing the MoD’s spending commitments into its budget: while the ministry has been filling in its financial hole, the spending review has been piling up more ramparts around the pit mouth. So the ministry is not only facing a 38 per cent cut in civilian staff over 10 years – more than 15 per cent have already gone – but also making difficult decisions on its equipment and infrastructure. “If you’re going to take out that level of spending, you’re going to have less capability available to you – and we withdrew the aircraft carriers and Harriers from service, and we closed some bases and we have less people,” says Thompson. “That’s the economic reality that we face.”

Nearly 20 per cent of forces jobs will also disappear – a fact that worries the public much more than the loss of civil service roles. Yet as Thompson points out, the vast majority of civilian staff are not “pen-pushing bureaucrats” but “doing incredible work in science or project management or research or maintaining equipment or working with suppliers or whatever. The number of classic civil servants working in HQ on policy is one to two per cent of the civilian population, and the vast majority are doing very practical work – but that gets lost in the debate, and that’s a pity.”

The public’s skewed sensibilities also create a presentational problem for the MoD: it might be more efficient to replace a back office military staffer with a civilian, but that cuts forces numbers while increasing the number of civil servants. “There is an inherent tension” in these decisions, Thompson acknowledges. “We have to navigate that as an additional dimension and layer to the question of: what’s the right kind of value for money solution for the taxpayer?”

At this time of difficult, complex financial decisions, it’s probably a good thing to have a finance professional at the helm – and Thompson is a talented and very experienced finance director. Blessed with a form of synaesthesia in which numbers are linked to colours – enabling him to see from glancing at a spreadsheet whether the figures add up – he joined Norfolk County Council’s finance team aged 18, and studied part-time to get his accountancy qualifications. After working for Eagle Star Insurance and Ernst & Young, he returned to council jobs and then moved via Ofsted into the education department. Appointed the MoD’s FD in 2009, he’s always been a cheerleader for the professionalisation of the civil service – and while he plainly thinks there’s room to further improve some of the Whitehall professions, he talks proudly of the progress that’s been made in the finance function.

When Thompson joined the MoD, he replaced the last unqualified finance director of a department of state – and since then, he says, “the capacity and capability of the finance function across Whitehall has improved because you’ve changed the leadership, and the leadership changes the way the system works.” Next April, he adds, control over the MoD’s budgets will pass from HQ to the frontline services: “The best person to run the Army is the chief of the general staff, not people in this building trying to decide what is and is not best for the Army,” he explains.

Professing support for professions
The MoD’s project management is also being professionalised, says Thompson – partly by improving in-house skills and capabilities, and partly by bringing in external partners. “The question for us is getting the right balance between our own people and support from the outside,” he says, noting that the ministry is developing a materiel strategy to set out “how we improve the acquisition of military capability and big, complicated programmes, many of which are technological leaders.”

Indeed, the MoD is pushing Whitehall boundaries by outsourcing substantial parts of its work, in an effort to cut head count and improve its efficiency and abilities. The ministry has already farmed out the leadership of its corporate services, says Thompson, while it’s looking for a partner for its information systems and considering whether to bring in a logistics partner. Defence Equipment & Support may well end up as a government-owned contractor – “A final decision is to be made late this year or early in 2013,” he says – and the Defence Infrastructure Organisation has shortlisted a set of firms keen to take over much of its management and frontline work. “We’re looking at ways to get private sector expertise and capacity into the organisation whilst keeping the essence of the civil service and the MoD at the heart of it,” he says, arguing that the ministry needs business partners “to bring in capacity, capability, skills, ways of working, information systems which take us forward as an organisation”.

Having worked in the private sector and local government for much of his career, Thompson has no qualms about reaching beyond Whitehall to bring in investment cash, technologies and skills – but his main message has been consistent ever since he joined Ofsted in 2005: the civil service, he argues, must become more professional if it’s to square the demands of ever-growing public expectations with its ever-shrinking public budgets. “This is a fantastic department of state and it does the most amazing things, but it needs to transform and reform itself into a professional organisation,” he says. “We need to significantly improve all the parts of the organisation that support the frontline: acquisition, project management, commercial skills, information systems; there needs to be a step change in all of those kinds of areas, and that’s the big thing for us in terms of changing this organisation on a functional level.”

That is, of course, a very big job; and it sounds as if Thompson would like to stick around long enough to make some serious progress. “People come into the MoD from outside, and to start with there’s a tremendous buzz about working in the defence landscape, but eventually you see people get to the point where either they’ve really got it and it bites them, or it doesn’t,” he explains.

Some people, worn down by the complexity of the organisation – by its cultural fault lines; by its multitudinous power structures and painstaking decision-making processes; by the three-way pull between military, civil service and political authorities – conclude “after six or nine months: ‘I don’t think I can work within this machine’,” says Thompson. But he feels thoroughly at home: “I completely get it, and absolutely love working here,” he says. “You’ve got to be able to work in quite a complicated cultural landscape, and you either survive that or you don’t. But for me it’s a tremendous experience; a great thing to try to work through. It bites me!”

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