Case studies

Defence Infrastructure Organisation

Procurement and selection of a strategic business partner

Overview

Deloitte has advised the Defence Infrastructure Organisation (DIO) on the procurement and selection of a strategic business partner to help manage its highly complex business.

The resulting savings from the new business model developed are estimated to number billions of pounds over the partnership’s initial 10-year life.

Its key features are that payment is – beyond a management fee – linked to performance so that the private sector partner is taking on risk, and that the partner will share its skills and train DIO staff.

Thus DIO may tap into private sector expertise without having to ‘pay’ for future flexibility.

This new model could be applied to other public sector bodies that also need some intervention to better meet their budgets, or address lack of resources or lack of relevant skills.

Background

DIO manages infrastructure on behalf of the Ministry of Defence (MoD). MoD owns approximately 1% of the UK land mass – everything from airfields to firing ranges to office blocks, which it accumulated as the operational needs of the military grew and changed over the years.

But now the MoD, like every Whitehall department, must make stringent economies, and using its assets more efficiently combined with disposing of those parts no longer needed can help it meet budget targets.

To best exploit commercial opportunities on behalf of the MoD to drive savings and better align the infrastructure to operational requirements, DIO needed access to learn new skills from private sector best practice including in the management of contracts, projects and strategic asset management.

A number of possible models and providers were available to enable DIO to gain this insight, but a wrong decision could have led both to a failure to gain best value from its assets, and possibly to reputational damage.

DIO asked Deloitte to advise it on choosing both a model and a partner to help it transform to:

  • improve relationships with the users of its services; 
  • establish a strategic management function to rationalise its property portfolio;
  • drive down running costs and improve estate utilisation;
  • invest in its management information systems; 
  • find out how to improve its staff’s skills and better motivate them.

Deloitte worked with the DIO to help it assess options ranging from simple outsourcing through to a full privatisation, and various permutations in between involving a private partner.

In each case, Deloitte looked at the extent to which the option concerned could help the DIO to best manage against reducing budgets, and at which models of payment by incentives would work best.

The transaction

This led to the development of a preferred model under which DIO would bring in a senior private sector management team from a chosen strategic business partner (SBP) to supplement its internal management team.

A second model was also considered that involved DIO becoming a Government-owned company (GoCo) with staff moving to into this under the Transfer of Undertakings Protection of Employment Regulations. This model would see the SBP take over management and was considered to offer greater opportunities to performance manage staff and so drive savings.

In both cases, the partner would be paid mainly through incentives, depending on its ability to meet performance objectives.

It was though not yet obvious which model would work best and so DIO, on behalf of the MoD, issued an advertisement in the Official Journal of the European Union in 2012 to seek an SBP and test both approaches.

Deloitte advised the DIO throughout the procurement, including preparing information for potential bidders, bidder engagement, procurement process, financial modelling and assisting with the approval process.

This bidding process was ultimately won by Capita, but with aspects of both models fused as a hybrid. This is thought to be the first example of this approach being used.

Under the arrangement arrived at, a senior management team from Capita will come in to supplement DIO’s skills but with the possibility of later moving to the GoCo model, with wider freedoms for the company to manage staff and budgets.

Capita has a 10-year contract, with the option to extend it for one year. There are also options to change its scope over that period.

There will be a performance review after the two years to assess progress against milestones and key performance indicators.

While the contract includes the alignment of payment to performance, it also allows for Capita to receive a management fee to cover the cost of the executive management team, and a transformation fee for achieving milestones within the first two years.

A 10-year rolling business plan sets out how ‘business as usual’ infrastructure activities will be delivered by the DIO, alongside wider initiatives to provide efficiency savings. It provides a strategy for land disposals, project management and workforce management and training.

This plan forms part of Capita’s contract and it will be updated annually. Within it are individual plans for each service delivery area, which identify initiatives and savings targets, and plans for optimising the size of the estate through rationalisation.

To deliver all this, Capita will apply its expertise through its executive management team. Capita will also offer the DIO access – at no further cost – where necessary to its wider specialist market knowledge, resources and skills to support the delivery of the infrastructure implementation plan so as to both supplement DIO staff and also improve their skills.

The number of executive managers from Capita will reduce over time as DIO staff members’ skills improve so that they can perform more of the functions needed.

Thus Capita will work alongside the DIO to help it become more commercial by learning from private sector expertise, rather than have DIO staff feel they have simply been ‘taken over’.

Strong governance is needed when a private partner takes charge of public assets and the contract ensures that Capita will be accountable for its performance.

Governance and performance management

The MoD has set up the Defence Governing Authority as a client body to performance manage Capita and to run certain retained strategic functions.

This body will govern both Capita’s contract and DIO’s performance against certain key performance measurements, and will approve payments to Capita. It will also manage stakeholder relationships across government.

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