Fighting fit

It is one of the UK's largest income-generating organisations; its turnover of more than pounds 1bn is easily enough to put it in the country's top 250 companies, possibly even in the FTSE 100. Except that the organisation in question, the Defence and Evaluation Research Agency (Dera), is an executive agency - its assets are owned by the state and its staff are civil servants.

John Chisholm, chief executive of Dera, confirms that ministers have several times examined the option of privatising the agency, but each time concluded it should stay in public ownership. Despite Mr Chisholm's background as a private sector scientist and manager - he was managing director of Sema Group UK before joining Dera six years ago - he is happy for Dera to remain an executive agency.

In many senses Dera, which undertakes the MoD's scientific research, is already run as if it is in the private sector. Mr Chisholm has introduced a cutting edge to the agency's management, using its adoption of resource accounting to replace 500 decrepit buildings, which cost pounds 30m a year to maintain, with a single elegant new headquarters that will recoup its cost in little more than three years.

Pay and grading have been transformed, replacing civil service wage structures with personal contracts and flexible individual assessment schemes. At the same time Dera has transformed the balance between managers and scientists. The agency used to be split equally between administrators and scientists; now 80 per cent of staff are scientists. The result, claims Mr Chisholm, is a vastly improved service for the Government, and better value for money.

Mr Chisholm believes that the transformation of staff attitudes, assisted by the pay and assessment reforms, has been central to changing Dera. All 14,000 staff are now clear about their responsibilities and targets. This has eradicated the old culture where 13 managers might have had to approve expenditure of just pounds 500.

Across most of the organisation Mr Chisholm found that existing managers were enthusiastic to be part of the new regime, having been frustrated by a system that stifled innovation and choked investment. The exception was with finance managers, some of whom have been successfully retrained, but most of whom have left.

Mr Chisholm compares finance managers of the old civil service with Marxist theoreticians in the Politburo of the Soviet Union. They were the unproductive people who laid down the rules to say what you could not do. With the adoption of resource accounting - which spells out the cost of assets, as well as the use of cash - more dynamic accountants were needed. "Tightening the financial management of the agency was the crucial thing," says Mr Chisholm. "It made me realise just how bizarre cash management is. You couldn't judge the running costs and the capital costs or keep costs down effectively.

"You had people rushing to spend money at the end of the year - underspending was regarded as a bad thing. Putting the organisation on to a conventional balance sheet and profit and loss account, introducing staff assessment, introducing natural disciplines so that all managers are made accountable, all of that creates quite a different atmosphere."

Before these changes were in place, explains Mr Chisholm, capital spending was always overbid against a pounds 90m budget. Afterwards, when bids had to be justified and the effects of spending would be evaluated against that claimed, less than pounds 30m of capital bids came in each year. "People suddenly became very risk averse because they had to show a pay-back."

There is no doubt, says Mr Chisholm, that the changes he introduced could not have been achieved without converting Dera to an executive agency, putting management at arm's length from politicians. "Agencies are fascinatingly different sorts of organisations. We don't have a board of directors - power rests with just one person, the chief executive," he says.

"I always believe that organisational structures should trail everything else - they are the last thing we should think about," says Mr Chisholm. "The first thing is, what sort of organisation do we want to be, then what processes are you going to need, and then what structures are you going to need."

But the result of these changes is a much more efficient organisation. Before John Chisholm took over, Dera was seen as much less efficient than its private sector competitors. But under market testing, Dera has repeatedly seen off commercial organisations. Not only is Dera cheaper, but its surpluses are re-used to improve the organisation, not diluted by dividend payments, proving, believes Mr Chisholm, that some tasks are better fulfilled by a public body than by the private sector. But the key has to be making organisations more responsive, and offering value for money.

There is no doubt that Dera has been transformed, under Mr Chisholm, into an effective fighting machinen