ICT in the UK public sector defence market March 2007 Good afternoon and welcome to this presentation on the UK public defence sector. My name is Chris Pennell and I am the Senior Analyst responsible for the Defence Vertical within Kable’s public sector research . Methodology – primary research with MoD and suppliers secondary research through government, supplier documentation Kable’s extensive knowledge of the public sector developed over 17 years of reporting on the public sector ICT market

ICT within the UK Defence market International View UK public sector defence market Structure Key drivers Key initiatives Procurement ICT market forecast ICT outsourcing Today I will be taking you through the latest defence overview and will begin with…

International view The commitments being placed on many armed forces are significantly different to those of 60 years ago, leading to a shift in armed force structures. This in turn has to be supported by a change in the way these forces are equipped. The UK is not alone in transforming its armed forces, but this transformation is running at different speeds across Europe.

European Defence market - total size For 2007 the following European members of Nato are forecast to spend €224bn on defence. Good news defence expenditure is set to continue to rise! But greater pressure for suppliers to show value for money. Overall spend is set to increase across Europe with the average spend per population head rising from €442 in 05 to €457 in 06. This spend is not set to be equal, it is not surprising to see the nuclear powers of France the UK leading expenditure as you might expect. But this is slightly misleading, if we look at defence expenditure as a % of GDP (better measure of effort to sustain defence capabilities) a different picture appears What we actually see are those countries with a higher expenditure devoted to personnel spending more as a % of GDP Next Slide

European Defence market – main drivers Nato Facing challenges of coalition warfare; Implementing Allied Ground Surveillance Project to provide interoperable network centric system. European Defence Agency Trying to establish role, but conflicts with Nato, who will win? The European Capability Action Plan is responsible for developing Istar capabilities Secretary of state:Alan Jonhson Ruth Kelly gone in May 2006 European Procurement Policy Seeking mutual benefit from an enlarged and common procurement market; Non binding approach makes this hard to enforce. Suppliers Looking to exploit markets outside of their domestic territory; Weakness in mid tier market due to strength of Primes;

UK public sector defence market structure

UK Ministry of Defence objectives The objectives of the Ministry of Defence (MoD) are to bring together maritime, ground and air components into coherent joint forces under a unified command fully capable of achieving the government’s strategic objectives. It must deliver appropriately motivated, manned, trained and equipped force packages, at the required level of readiness, and with the necessary support, sustainability and deployability, to achieve the full range of agreed military tasks. The military has a history of organising its armed services according to air, sea and land operations, but the current ethos is to work as an integrated unit. This has obvious implications for organisation structure, and for the technologies used to communicate and share information. Functions, such as equipment acquisition, policy definition, and planning and resource allocation are provided by the support functions across the three services

UK Ministry of Defence hierarchy Ministers are supported by the top management of the MoD, headed jointly by the Chief of Defence Staff and the Permanent Secretary The Defence Management Board acts as the executive board of the MoD, providing senior level leadership and strategic management of Defence. It is responsible for: the role of Defence - providing strategic direction, vision and values; objectives and targets - establishing the key priorities and defence capabilities necessary to deliver the MoD's Departmental objectives; resource allocation and strategic balance of investment to match defence priorities and objectives; and performance management - managing and driving corporate performance

UK Ministry of Defence top level budget holders structure Commander in Chief Strike Chief of Joint Operations Commander in Chief Land Fleet (Includes Chief of Naval Personnel) Personnel & Training Command Central Adjutant General Defence Equipment & Services* Defence Estates Science, Innovation & Technology GOC NI Operations and Front Line Personnel Acquisition Support And Most defence activity is managed through Top Level Budget (TLB) holders The Permanent Secretary delegates power over financial, personnel and property resources to each TLB.

UK public sector defence key drivers

UK Ministry of Defence key drivers ICT investment drivers and inhibitors Network Enabled Capability The Comprehensive Spending Review 2007 Force modernisations / capability change Strength of supplier base Ongoing operational commitments in Iraq and Afghanistan Expenditure ICT Internal focus on change Inhibitors Drivers Technology developments Increase in the number of overseas operations Continuing integration of back office systems Poor procurement across large programmes Shared services programme Ongoing recruitment shortage

UK public sector defence initiatives

UK Ministry of Defence - transformation There are three main themes to the transformation program; improving military effectiveness – the effect that armed forces and military systems can deliver; efficiency improvements – spending money wisely, making savings and focusing funds on “front line” capabilities, and; exploiting technology – to improve everything from communication to strike capability Implications of the transformation program include; new force structures and enhanced networking; delivering efficiency savings; delivering new capabilities to time and to cost; planning effectively for the introduction of new capabilities; Identifying changing needs for future skills and capacities; improving the professionalism with which all aspects of activity are conducted, and; research and development in new technologies that might be needed to meet future needs The primary role of the Defence Management Board is to provide more flexible Armed Forces to achieve greater effect and a more flexible, more efficient defence organisation.

UK Ministry of Defence - efficiency programme Split between - Corporate services – covering military Human Resources; civilian Human Resources; finance; estates; information infrastructure, and; Defence Logistic Organisation enabling infrastructure. Logistics – covering Defence Logistics Transformation Program, and; Whole Fleet Management. Examples of efficiency programs - Procurement - Procurement Reform, and; Defence e-Commerce Service. Organisation and relocation - Further reductions in Head office; The relocation of defence activity out of London. Force structure - A shift in emphasis from heavy to light and medium weight forces in the Army, and; Reorganisation of Ground Based Air Defence. Manpower - Comprising reductions in manpower to reflect the improvement programmes, and; Productivity comprising increases in the proportion of military personnel fit-for-task.

UK Ministry of Defence - change programme The twelve most important change initiatives are included in the Defence Change Programme and cover - Defence Logistics Transformation Programme; Defence Information Infrastructure; Estates Modernisation; Defence Training Review Transformation; Joint Personnel Administration; Defence Health Change Programme; Broadening Smart Acquisition; Acquisition for Network Enabled Capability; Whole Fleet Management; Fully Serviced Infrastructure; People Programme, and; UK Military Flying Training System. The Defence Change Programme is directed by the Change Delivery Group, reporting to the Defence Management Board and Ministers.

UK Ministry of Defence - shared services Leads in the shared services agenda due to the size and scale of the back office systems and process required to support a staff level of 300,000 across more than 25 countries. Shared services objectives; focused on the realisation of cost savings and increasing effectiveness of current resources, and; planned reductions in headcount of 15,000 staff to release £300m of savings annually To date; consolidation of transaction and infrastructure functions into shared services centres; estate rationalisation; improved strategic oversight, and; improved business process. Going forward the MoD will focus on – human resource (Civilian) - a unified People Service Centre; human resource (Military) – a comprehensive, triService personnel administration system; finance – the simplification of financial processes along with a greater focus on collecting and analysing the costs that managers actually control and that inform better decision making; estate – an estate of the right size and quality; ICT – a secure and coherent Defence Information Infrastructure (DII), and; commodity procurement – using a single set of procurement processes and a common set of en-enablers

UK public sector defence procurement

UK public sector defence procurement In 2005/06 the MoD placed nearly 26,000 contracts with a collective value of approximately £18.2bn. Of this an estimated 97% are for contracts worth less than £100k The number of contracts placed decreased between 2004/05 and 2005/06, but the value increased by nearly £3.4bn (22.5%) over the same period. Of the total MoD contracts placed, 60% were priced through an open competition process.

UK public sector defence procurement models and approaches The MoD is adopting a more flexible approach to procurement. Change has centred on creating a procurement system which has a greater focus on support, sustainability and incremental enhancement of existing capabilities. The policy has opened up the number of procurement models for the MoD, which include; commercial off-the-shelf offerings, including the competitive purchase of proprietary products; competitive development/production/in-service support; non-competitive procurement (with or without development); collaboration/international collaboration; cooperative development with Industry in a jointly funded programme; incremental acquisition; partnering and alliancing; public/private partnering and private finance initiative; hiring/leasing; enabling arrangements, and; contracting with MoD agencies.

UK public sector defence procurement defence acquisition change programme The MoD has embarked on a change programme in the way in which it organises its internal procurement procedure, developed from the Defence Acquisition Change Programme; Fundamental to this change has been the creation of a unified customer model, and from April 2007, this will be supported by a single procurement and support organisation, the Defence Equipment and Support (DE&S). The new organisation will structured around three “pillars”, or sections – the capability pillar; the customer-facing pillar, and; the corporate pillar. All of this is set within a central framework covering policy, financial and planning. The key participants in the new unified customer model are expected to be; the sponsor, who leads the capability change programme to achieve policy goals within allocated resources; the DE&S, to deliver equipment and support, and; the end user.

UK public sector defence ICT market forecast

UK public sector defence ICT forecast Total ICT expenditure will slow down from £2.04bn in 2005/06 to £1.98bn in 2009/10. Expenditure is expected to level out due to; completion of some major equipment programmes, but; delay in taking some equipment programmes to main gate point is a concern; there are areas of growth associated with software and communications and consolidation of back office systems. Video Secondary- ICT spend it: Where to spend it - 1.48 to 2.59

UK public sector defence product expenditure forecast Spending likely to be erratic. Highest growth in Communications (5.5%) expenditure reflects major investments in the underlying infrastructure to support NEC. Slowdown expected in In-house staff (-3.6%) due to move to more outsourcing Combined Total (£m) 2005/06 2006/07 2007/08 2008/09 2009/10 CAGR Hardware 375.2 376.9 353.6 338.9 340.4 -2.4% Year on year growth 0.5% -6.2% -4.2% 0.4% Software 294.6 286.0 300.9 315.4 305.4 0.9% -2.9% 5.2% 4.8% -3.2% Services 1083.3 997.4 1039.3 1061.6 1017.9 -1.5% -7.9% 4.2% 2.1% -4.1% Communications 185.7 186.2 212.1 227.7 230.3 5.5% 0.3% 13.9% 7.4% 1.1% In-house staff 101.5 106.6 88.9 68.4 87.8 -3.6% 5.0% -16.6% -23.1% 28.4% Total 2,040.2 1,953.0 1,995.0 2,012.1 1,981.8 -0.7% -4.3% 2.2%

UK public sector defence top level budget ICT expenditure forecast Top Level Budget Holder Total Spend 2006/07 (£m) ICT Spend 2006/07 (£m) Percentage of Total ICT Expenditure ICT Spend over Total Expenditure Strike Command £3,729.7 £26.3 1.34% 0.08% Land Command £6,290.0 £45.9 2.35% 0.14% Commander in Chief Fleet £4,193.2 £23.3 1.19% 0.07% Chief of Joint Operations £518.5 £21.1 1.08% Adjutant General £1,807.1 £50.8 2.60% 0.16% RAF Personnel & Training Command £926.5 £9.6 0.49% 0.03% Defence Logistics Organisation £7,317.0 £456.7 23.38% 1.42% Defence Procurement Agency £2,460.0 £1,146.2 58.69% 3.55% Central £3,320.2 £107.7 5.51% 0.33% Trading Funds £1,436.0 £65.6 3.36% 0.20% Departmental unallocated provision £263.0 N/A Total £32,261.2 £1,953.1 100.00% 6.05% IT spend will increase by 5% due to more and more specialise IT for simulations, pharmacy

UK public sector defence product opportunities Hardware Software Services Comms Back Office Off-the-shelf Desktops Support & training Data services Development tools Laptops Maintenance Mobile Database SW Equipment Programmes Desktops Operating systems BPO / MS Data services Servers Off-the-shelf Maintenance Mobile data

UK public sector defence ICT outsourcing

UK public sector defence ICT forecast In 2006/07 the annual value of ICT and Business Process Outsourcing (BPO) spend for defence is £753m, and this is forecast to grow to £785m in 2009/10, a CAGR of 1.3%. IT represents the largest segment by expenditure within the outsourcing market place, due mainly to one contract, the Defence Information Infrastructure (Future) (DII(F)). Future growth areas; development of the managed services segment; growth in the BPO segment; communications, and; estate consolidation and training.

UK public sector defence ICT suppliers Supplier market share; EDS is the biggest winner from the outsourcing trend, in 2006/07 EDS is estimated to account for 34% of the total ICT related outsourcing business; the ICT and BPO sector is dominated by small number of contracts, and the MoD prefers to procure ICT and BPO outsourced equipment and services via prime contractors.

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