The Tier Zero contractor

Publication date: 2007

• Introduction
• Tier Zero overview and roles
• Tier Zero examples
• Tier Zero characteristics
• Concluding comments

The UK Ministry of Defence (MOD) Defence Industrial Strategy (DIS) has set out a new environment for UK’s research, development and procurement of equipment and services. One of the more significant features of this environment stems from the visible recognition that many of the MOD’s requirements are not supplied from a wholly free, highly competitive marketplace that can be operated in a hands-off way by the customer. Instead, complex products and services that do not exist in the wider market require either bespoke solutions or unique technical innovation (to achieve a cost-effective ‘battle-winning’ edge), often from single sources. In short, this environment acknowledges that MOD carries and shares in a substantial procurement risk with its suppliers. Some would say that this has always been the case, however the Levene reforms of the mid-1980s, although valuable in many aspects of procurement, have suppressed the customer’s ability to recognise the risks by driving a hands-off approach and a belief that risk was ‘transferred to industry’. The concept of the ‘Tier Zero Contractor’ has been introduced by RUSI as a natural consequence of the strategy. This short paper sets out what it means to be a Tier Zero contractor, and the characteristics required to operate as one.

Tier Zero overview and roles

The clear language of the DIS describes Tier 1 and Tier 2 contractors: "it is traditional to talk about ‘Tier 1’ or ‘prime systems integration’ systems – which tend to be platforms – and ‘Tier 2’, which are (often still complex) systems incorporated into platforms." This typically has Tier 1 contracting directly with the MOD as customer and Tier 2 as subcontract suppliers to Tier 1. RUSI’s collated response to the DIS introduces the Tier Zero: "MOD would benefit from objective advice on both the supplier and customer side. The lead systems integrator approach used in the US should be considered for the UK. Tier 0 contractors (contractors that provide services to MOD on the customer side of the customer-supplier divide) have no vested interest and can provide an independent assessment to MOD of what capabilities are achievable particularly in an assessment phase."

Tier Zero contractors can act in the customer’s interests through all stages of a project. There are two, characteristic, main functions:

• Acting at the top of the process: Initially exploring and scoping the solution space, for example the development of conceptual options, their architectures, costs, timescales and risks. This might include requirements capture and technology mapping to open up, move and then begin to re-define the solution space. Later, as a project delivers end results, functions include advising on or conducting final acceptance. It is essentially about defining the solution space and the architectures for realistic, acceptable outcomes: it is about realism and risk reduction.
• Acting up and down the process. Here the function is to be the customer’s ‘eyes-on’ (if not ‘hands-on’) the solution development, its realisation and gradual verification and validation to assure that the original intent is being delivered by the Tier 1, 2 and 3 suppliers. It is essentially about providing progressive, independent assurance: it is about assured risk reduction.

In the past this description might be thought of as a ‘customer friend’. This term has many interpretations but is no longer definitive enough, particularly as it implies a supporting role to an already well-informed customer. A new term that is more descriptive and more relevant today is the ‘critical partner’, implying pro-activity and leadership for a customer that may not be as well- rounded an intelligent customer as he would like to be4. It means doing or saying what is right, rather than what the customer may think he wants and, importantly, there are the added dimensions of a long-term, enduring relationship that embodies knowledge transfer to the customer rather than being just ‘another pair of hands’.

For the MOD, the result is that he is an increasingly educated, continually-informed, continually-aware customer who has identified, understood and bounded his risks and is continually reducing their impact or likelihood. For the Tier Zero contractor, the prize is an enduring, long-term relationship, with sufficient challenge and volume to create the right balance between investment and revenue.

More of the defence budget than ever before is spent with industry. The strategy for acquisition must determine the most cost-effective apportionment of roles and responsibilities between uniformed staff, civil servants and contractors in the value chain which delivers military capability to the end user. Final responsibility rests with the equipment central customer who must ensure that equipment and services procured from the private sector are effectively integrated with other lines of development.

However each constituent has strengths and weaknesses in managing specific risks; therefore roles and responsibilities should be allocated within the acquisition strategy so as to maximise the chances of managing risk effectively. The Tier Zero contractor can be an important asset in ensuring the effective management of the customer’s risk.

Many examples exist across MoD projects where the concept of the Tier Zero contractor has been successfully employed, albeit on specific aspects of the customer role. Two in particular illustrate the benefit which a non- advocate expert can have on the relationship between prime contractor and government when employed as a Tier Zero contractor.

Among the most important strategic choices is that of defining the nature of the interface between public and private sector constituents. The National Audit Office (NAO) recognised the value of an independent source of informed advice in its 2005 report Driving the Successful Delivery of Major Defence Projects: Effective Project Control is a Key Factor in Successful Projects. In discussing the factors that led to the Gold Standard award to the HMS Illustrious Refit, the NAO highlighted the importanceof independent assessment of the effectiveness of the relationship between the government and its prime contractor.

The problems with the Nimrod MRA.4 programme have been well publicised. In 2002 it became apparent that fundamental programme change was required. A review was carried out jointly by DPA, BAES and an independent consultancy acting at ‘Tier Zero’. Refurbishment of aircraft was halted (other than the three prototypes) pending demonstration of improved programme performance.

A reform initiative was established which separated the programme into three main elements: D&D, production and partnered support. A new, incentivised contract was established for D&D and a new timetable was agreed for the provision of fully costed and risk-assessed bids for the production and partnered support elements. Changes weremade in the senior management and organisational structure of the programme, and the reform initiative was established as a distinct, planned project. A steering committee was established to lead reform. This included MOD and industry ‘champions’, delivery stream and programme directors, and support from an independent Tier Zero specialist. The initiative was funded and incentivised by MOD in order to remove potential barriers to success. The key objectives of the reform project were to regain credibility with the project stakeholders and to regain control of the programme.

Evidence of the initiative’s success was provided by the MOD’s Reform Champion in 2005. Success required the establishment of open and collaborative behaviours and culture within the project, allowing joint management and decision making. As well as the behavioural improvements, the programme began to achieve key milestones on time. The first flights of the two first prototype aircraft took place at the forecast dates (50 per cent probability) which were established at the re-baselining of the programme. Several independent reviews have reinforced this view of a successful reform. As part of the rigorous project control regime which has been adopted, integrated baseline reviews and demonstration reviews have been conducted under independent control to meet established criteria.

To perform Tier Zero functions, with or for the customer, requires the combination of rare capabilities as well as the right culture and motivations. Key characteristics include:

• Guaranteed independence from wider commercial pressures of the Tier 1, 2 and 3 suppliers, as well as from the possible distortions of other vested interests, or those with short-term objectives, that might include shareholders and the City. The result is genuinely impartial objectivity.
• Experience of the customer’s needs and ways of working to establish a trusted credibility so as to act with and for the customer. This is motivated by the achievement of a long-term, enduring relationship rather than short-term profit. This allows the advice to be critical of the customer when it needs to be. Similarly this motivation is not affected by the project solution, allowing absolute impartiality between, for example, a bespoke solution with high design and manufacture content, and an off-the-shelf solution.
• Knowledge and experience in the fields of the technology, the supplier industrial base and the end user. This needs an appreciation of the risks and opportunities of new technologies, as well as the realities of in-service operation of current technology. It means understanding the end-customer as well as the supplier, being able to broker solutions that balance (or trade-off) real needs with supplier capabilities. It must keep up-to-date, for example, by exercising real design and in-service support.
• Innovative thinking that starts with being able to see the bigger picture to develop concepts from a ‘blank sheet’ and to create architectures (i.e. complete, balanced, integrated solutions) not just technologies or discrete ideas. These architectures must be integrated at the highest level of complete platforms, or complete service deliveries. Realistic architectures include the qualities of cost, timescale and risk to bring them into the real, measurable world. This innovation is stimulated by the Tier Zero contractor having interests and experience beyond Defence and the UK and a constant watch on R&D developments.
• Leadership to explore the solution space either alone or leading a ‘dream team’ of expertise drawn from many supplier companies in different Tiers and stakeholders. Effective leadership here may be seen as stimulating innovation in others, not only for the benefit of the MoD customer but for the business of the suppliers. The Tier Zero is not there to ‘eat the Tier 1 or 2’s sandwiches’, but he can help the Tier 1 to make them!
• Breadth of professional perspective that covers the full range of supporting functions, such as: technology watch and road-mapping; costing; project management; risk assessment and control; safety and hazard management; reliability and maintainability management; partnering or alliance management; and quality management.
• Discipline, tools and a quality management system that genuinely drives rigour into assurance processes; the extreme example being the ability to carry the responsibility for safety assurance.
• Skills that are exercised and continually demonstrate the qualities above. A Tier Zero contractor is likely to be conducting his own research activities and has an active training and development programme for its people.

The DIS sets a new climate for the MOD’s acquisition risk management that shares risk with rather than transfers risk to its main suppliers. This demands a very well informed customer, ready to manage his share of the risk. The critical partner or Tier Zero Contractor is an important way of bringing objective, impartial control and discipline to that responsibility as well as enhancing the customer’s competence. The Tier Zero contractor has a rare combination of qualities, characteristics and motivation.

Tier Zero contractors have an independence from manufacturing and other vested interests and are likely to be small or medium enterprises (SMEs). Such SMEs see both threats and opportunities in the DIS. The opportunities can be more clearly defined by the MOD’s intention to nominate roles for certain SMEs, just as is explicit for the Tier 1 primes. Indeed the implementation of the DIS is naturally preoccupied with the larger companies at Tier 1, leaving uncertainty at other tiers.

This inevitable uncertainty during DIS implementation brings pressures in the marketplace for potential Tier Zero contractors to change their business models or leave the business altogether. There is the real possibility of Tier Zeros exploiting their skills in a different direction, deliberately losing their independence to stay in business, for example allowing acquisition by, or strategic partnering with, a Tier 1.

The DIS needs to move rapidly, yet market forces are too slow and will produce the wrong answer. Just as the larger suppliers are being pre-positioned by the MOD, the SMEs also need to know where they stand. Early, parallel action is needed to build the complete industrial architecture demanded by the DIS.

Source: Global Defence Review
Publication date: 2007

Related Defence Supplier Guidance

• UK MOD Defence Industrial Strategy

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