BAE:EADS Talks need to shake-up the malaise in the UK's defence procurement thinking

On reflection, you can imagine the stark choices faced in the Boardroom of BAE Systems with regard to the corporations prospects for independence.

The UK defence budget can been, regardless of the methods of monetary measurement, in a state of decline versus the rate of defence inflation (ie. the ever increasing expense of state-of-the-art procurements) probably since the end of the Cold War.

This is not intended as reflecting upon any particular party. The Peace dividend associated with the fall of the Berlin Wall and Gulf War of 1990-91 set in train an ideological position that defence was out of control.

As the post cold war period has unfolded the Ministry of Defence, through repeated difficulties in managing defence acquisition left itself open to repeated charges from Administrations of both sides of the political spectrum to be not managing public funds properly. This in term led to expedition political reorganizations which only served to confuse military and civil service managers, resulting in more problems, more reviews and thus the spiral into chaos. All at a time when the tempo of actual operations is the highest in a generation.

The impact of new accounting methods at the ministry of defence coupled with the challenge of getting politicians to buy into new procurements has led to lower numbers and higher unit costs - which for a prime contractor is not going to offer the long production lines which are rewarding commercially vis-à-vis the risks of construction.

The Astute SSN program me is a good example. Repeated delays led to suppliers, fearful of the only nuclear submarine program in town being cancelled, rapidly increased the charge for their components - leading to an increased unit cost which the Prime could not realistically hold down.

The new aircraft carrier program, which in a more sensible world would probably have been rescoped or cancelled by now in favor of more frigates, will have absorbed political interest in what is on the whole a relatively low-tech manufacturing exercise compared to a fighter jet and leave little stomach for even the essential need to replace the frigate fleet.

Little wonder that BAE executives, having tried the Middle Eastern export route (Al Yamammah - USA now pushing hard on their own with Saudi Arabia), handling civil aviation (divested their Airbus interest), then the US acquisition route (as Iraq and Afghanistan wind down the bonanza in land systems work is slowing) are now left throwing the dice and their market capitalization dwindles and either getting a US player to commit or else harness themselves for protection to a European combine.

The MOD, working with the idea of privatizing its defence procurement activity needs to sit and think really hard about the future - not just about pleasing current political masters. It could be suggested that actually what is required is a small acquisition team focused on the commercial deal and legalese. The military develops requirements in accordance with the size of the cloth. All that remains is a new 'class A' (new platforms) and 'class B' (platform/equipment in service support and upgrade) approach.

The UK was master of defence procurement in the Second World War with a small staff and a will to achieve its goals. Chasing the commercial strategy of its domestic prime is not the way to go - organizing itself to best manage the small and medium sized players who will keep the military in the game is crucial.