Cost Culture in the Army ASMC Mount Vernon Chapter 17 February 2011

 The Fiscal Environment  Institutional Adaptation  Acquisition Reform Improve ARFORGEN Adopt an Enterprise Approach Reform Requirements and Resourcing Processes Time Ability to Influence Cost Earlier & Often Why “Cost” Slide 2

0% 5% 10% 15% 20% 25% 30% 35% 40% $0 $5,000 $10,000 $15,000 $20,000 $25,000 VIETNAM (1968) 8.9% KOREA (1953) 11.7% GULF WAR (1991) 4.4% WWII (1945) 34.5% REAGAN (1986) BUILD UP 6.0% FY2019* 3.3% GDP (TY $ in B) % of GDP FY2010* 4.6% (TY $ in B) Key Summary FY10 (3.7% excluding OCO, 4.6% including OCO): ? GDP: $14,405B (CBO est.) ? Base: $534B ? OCO: $130B FY2015* 3.5% OMB Projection CBO Projection - CBO Projection Fiscal Environment Federal Spending Federal Deficit/Surplus Defense as a Percentage of GDP Defense Funding CY00 $ in B Projection Fiscal Year TY $ in B Supplemental Appropriations* Base Appropriations PROJECTION 639 Slide 3

Army Fiscal Environment Slide 4 CJCS ADM Mike Mullen warning, “the nation’s debt is the biggest threat to U.S. national security... interest on our debt is $571 billion in 2012” SECDEF Gates: “... it is imperative for this department to eliminate wasteful, excessive, and unneeded spending—to do everything we can to make every defense dollar count.”

Improve ARFORGEN RESET ROC Drill Tasks Title 10 Assessment Reform Requirements and Resourcing Processes Reno Study Adopt an Enterprise Approach OBT Governance (Div of Labor, CE Charters) Metrics / Management Data Systems (EMDS, ESS, SMS, ESAT, AST) Reno Study Packages 7 & 14 Imbed Cost Skills in TRADOC / Army Wide Ensure a Cost Informed Requirements Process Develop Training - Career / Certification Course Develop Policies and Procedures Army Campaign Plan Institutional Adaption Leadership-driven cost management is a critical need in an era of constrained resources. Leaders must hold their subordinates accountable for knowing and being able to explain the cost of generating products and services to meet customer requirements and the cost of sustaining their organizations. Cost management includes the capability and capacity to perform the following functions: cost planning, cost accounting or cost measurement, cost analysis, and cost control. Cost analysis includes the capability and capacity to perform cost- benefit analysis. Cost-benefit analysis, a disciplined cost estimation and analysis of benefits, is required by decision forums Army-wide. Senior leaders must receive a clear value proposition and recommendation in which the benefits more than justify the costs and required trade-offs. Slide 5

Senior Leader Messages - 1 Slide 6 15 JAN 2009 SA and CSA--Institutional Adaptation 30 DEC 2009 USA and VCSA--CBA to Support Enterprise Decision Making 04 JUN 2010 SECDEF--Guidance for Improved Operational Efficiencies 26 AUG 2010 SEC Army--Oversight of Army Efficiency Efforts 02 SEP 2010 USA--Guidance on Implementing Army Efficiency Initiatives

Senior Leader Messages - 2 Slide 7 01 OCT 2010 Business Transformation Plan Cost Culture Initiative--Ranked #1 07 JAN 2011 ASA-FM&C Implementation of Cost Management to Strengthen Financial Management 06 JAN 2011 SECDEF– Announces additional $78B in DoD Efficiencies  Reduce senior ranks; freeze civilian staffing levels  Force structure reductions  Joint Chiefs of Staff are fully behind SECDEF 27 DEC 2010 SECDEF– Consideration of Costs in DoD Decision-Making

ARE WE IN A COST WAR? Slide 8 The Cost War is the struggle to accomplish the mission in an environment of constrained fiscal resources.

What Have We Learned about Cost Management? In general: Pilot studies and efforts over the last twenty years have shown: –Significant, sustained improvements –Benefits greatly exceeded the cost of the effort –Cost management does not occur naturally –There is usually a temporary, initial hurdle of defensive reaction to change Slide 9

Cost Planning Cost Controlling Cost Analysis Cost Accounting Cost Management Process Full Cost Measurement –Accurate, timely and relevant data –Connecting operational output/performance data to financial data –Allocate Overhead, Unfunded Costs, Indirect Support Cost Analysis –Variances –Trends and forecasting –Product, service or activity cost by expense (labor, material, contracts, etc…) –Understanding full costs of organizations, operations, products and services –Comparison Analysis & Benchmarking Cost Planning –Operational managers set cost targets and efficiency goals –Plan cost based on outputs produced Resource Informed Decisions –Take action based on analysis and external demands –Change targets –Change resources –Change quantity / quality Cost Management Slice 10

Maturation of Cost Roles in Winning the Cost War Slide 11 Single Use Estimated Future Cost Cost Informed Decision Making Cost-Benefit Analysis Single Use Estimated Future Cost Cost Informed Decision Making Cost-Benefit Analysis Persistent Use Expected & Actual Cost Continuous Improvement Cost Managed Organizations Persistent Use Expected & Actual Cost Continuous Improvement Cost Managed Organizations Universal Use Planned & Actual Cost Role Based, Org Based, Output Based Control Cost Culture Universal Use Planned & Actual Cost Role Based, Org Based, Output Based Control Cost Culture Cost War Cost War High Cost War Full Insurgency Intensity ConflictSpectrum Operations Today we do a little…… Target

Key Cost Culture Adaptation Issues Changing mindset is a “people issue” not an accounting issue –Good cost measurement is necessary, but insufficient for success GFEBS is Army’s cost engine of the future –Major problem is that leadership has: Little, if any, experience in cost management, when compared with industry Already demanding number of responsibilities Little time for necessary level of training and development Slide 12

Cost Culture Adaptation Solution Build a very capable staff organization of “Army ACEs” to guide command in –Running the Enterprise Review (ER) process –Developing pre-ER issues and potential actions –Conducting private post-ER critiques and follow up Run the ER process through a Cost Culture Team; current thinking suggests the following complement: –Organization Commander/Manager – Chair –Higher Level ACE –Organization ACE –Organization Financial Manager –LSS Staff ACE: Asst to Commander for the Enterprise / Analytical Cost Expert Slide 13 ER: A periodic after action review of cost and performance variance reports Slide 13

Who Do We Need? Engaged Leaders Strong Staff (ACEs / Cost Warriors) –Analysts with strong costing skills –Operations managers with continuous improvement focus Cost Measurement (Cost Accounting) –GFEBS cost champions Cost Control Process (Cost Management) –Periodic Enterprise Reviews among commanders and their managerial staffs –Focused ERs with actionable outcomes Slide 14

The Cost Managed Enterprise I. We will not attack or defend past practice II. We will always seek better ways to operate III. Savings will fund saver’s unfunded priorities IV. Commanders will understand cost and drive improvement initiatives Should Cost Could Cost = Less Cost Budget Efficiencies  Spending, not budget, drives mission  Efficiencies are budget multipliers  Cost-managed enterprises  Command and control cost  Are self supplementing  Continuously improve  Aggressively stimulate creativity Execute Measure Plan Spending ER=Enterprise Review ER Mission Effectiveness Slide 15

Cost Management and Control: National Security Implications What if the cost of a BCT could be reduced by a third while maintaining the same effectiveness? Simplify the math by considering Army Budget to be 30 and initial BCT cost to be 3 ARMY Budget 30 initial BCT cost 3 = = 10 BCTs ARMY Budget 30 2/3 initial BCT cost 2 = = 15 BCTs NB: a one third unit cost reduction yields a 50% increase in BCTs (“My guess is that a third of the defense budget goes into the friction of following bad regulations – doing work that doesn’t need to be done.” Bob Stone - former DASD Installations, Reinventing Government) xxxxx xxxxx xxxxx xxxxx xxxxx Slide 16

Call to Action—What You Can Do Slide 17 Join the Cost Warrior Corps –Acknowledge the threat to mission accomplishment and national security from “under-managed” use of resources –Recognize that “cost effectiveness” is a core value in a Cost War –Seek out and do your part to fulfill your commander’s intent in fighting the Cost War –Consider becoming an ACE (Assistant to the Commander for the Enterprise or Analytical Cost Expert) Build your cost competency—it’s a critical skill –Adopt a continuous improvement mentality –Lead or join the cost culture team within your command –Practice cost management and continuous improvement –Learn information technology skills to leverage the cost intelligence within GFEBS

Building Stackable Credentials Slide 18

Build Cost Skills Slide 19 ICAM Cost Flow Methods Analysis and Reporting Practical Exercises Complex Case Studies Cost-Benefit Analysis ICAM Cost Flow Methods Analysis and Reporting Practical Exercises Complex Case Studies Cost-Benefit Analysis End State: FM Community possesses the knowledge and skills necessary to leverage cost management. End State: FM Community possesses the knowledge and skills necessary to leverage cost management. PCAM Cost Terms Cost Concepts Fundamentals of Cost Accounting and Cost Management Practical Exercises Cost-Benefit Analysis PCAM Cost Terms Cost Concepts Fundamentals of Cost Accounting and Cost Management Practical Exercises Cost-Benefit Analysis CMCC Managerial Cost Accounting Operations Management Cost Control and Cost-Benefit Analysis Organizational Development for Cost Managers CMCC Managerial Cost Accounting Operations Management Cost Control and Cost-Benefit Analysis Organizational Development for Cost Managers Soldier Support InstituteNaval Postgraduate School LTCPTMAJLTC / COL Principles of Cost Accounting and Management Intermediate Cost Accounting and Management Army Cost Management Certificate Course SGTSSGSFCMSG / SGM Interns/GS-07/09GS-11GS-12GS-13/14/15

Cost Management Certificate Course CMCC Homepage : The CMCC is an intense four-week resident graduate education course that is taught at the Naval Postgraduate School (NPS) in Monterey, California. This course is designed to teach students how to manage Army business operations efficiently and effectively through the accurate measurement and thorough understanding of the "Full Cost" of business processes, products, and services. Certificate holders will become part of a community of practice equipped to help decision makers provide the best value to customers and stakeholders. Herrmann Hall, Naval Postgraduate School CMCC Course Schedule for FY11 SESSION NO DATES APPLICATION DUE DATE SEP - 22 OCT AUG OCT – 19 NOV SEP JAN – 04 FEB DEC FEB – 04 MAR DEC APR – 29 APR FEB MAY – 27 MAY MAY JUL – 05 AUG JUN AUG – 02 SEP JUL 2011 Managerial Costing—instruction in cost concepts and analysis techniques with a strong focus on analytics. Operations Management—the fundamentals of design, management, and control of operational processes and project management used in cost management. Cost Control—cost control theory, leadership driven management, practical examples of cost control issues and solutions, cost benefit analysis and Army case studies. Organizational Effectiveness for Cost Managers— systems thinking, interpersonal communication, listening, motivation, leadership, message framing, decision-making, persuasion, power and social influence, and negotiation. Slide 20

Ideal CMCC Candidate USA Memo 27July 2010 Find the memo: Slide 21 Demonstrates analytical competence, a strong work ethic, sound judgment and an aptitude for quantitative reasoning Is personally and professionally motivated to playing a leading role in enabling the command or agency to implement cost management principles Has the strong support of the command or agency’s senior leaders Will, after completing the course, be assigned to a position that enables the graduate to identify and help implement projects with a high potential return on investment Will be supported by a command or agency mentor who will assist in identifying appropriate projects Will, after gaining experience, serve as a mentor to other CMCC graduates Is an improvement-oriented self starter who has demonstrated a strong potential for handling increased responsibility. Will, after completing the course, participate with other graduates and mentors from HQDA and NPS in monthly meetings of the “Cost Warrior Roundtable

Will there be Success? Part of the human response to change. Slide 22 Time Performance A. B.B. C. D. A. “This will never work.” B. “I told you so.” C. “I still don’t know what I’m doing.” D. “Why didn’t we do this years ago”? Stage 1Stage 2Stage 3 Slide 22 Source: Jerald M. Jellison, PhD, Managing the Dynamics of Change, McGraw-Hill

Questions? Comments? Slide 23

BACK UP Slide 24

Institutional Adaption Memo Signed 15 JAN 2009 –HON Pete Geren, SA –GEN George Casey, CSA Elements of Institutional Adaptation –Improve ARFORGEN –Adopt enterprise approach –Reform requirements and resource process and inculcate cost culture Slide 25

Army Campaign Plan There are 9 Army Campaign Objectives HON Matiella, ASA- FM&C, has the lead for Objective 9— Transform Business Operations –Assist is LTG Durbin, Office of Business Transformation –Army Management Enterprise is the core enterprise with the responsibility Slide 26

Strengthen Financial Management Increase the effectiveness of financial management and improve stewardship of taxpayer dollars Adapt current business practices to leverage integrated Army ERPs, enhancing process controls: –GFEBS (General Fund Enterprise Business System) –GCSS-Army (Global Combat Support System-Army) –LMP (Logistics Management Program) –IPP-Army ( Develop leaders to make resource-informed decisions, enabled with essential cost management skills Transform PPBE process to provide agility and flexibility needed to adapt to the changing needs of the Army Slide 27

ACP Objective 9.5 – Strengthen Financial Management Slide 28 OBJECTIVE: Increase the number of Generating Force (Infrastructure) organizations executing quarterly cost management reviews, increase the use of cost benefit analysis and improve the Cost Management Maturity Model index score. MeasureBaseline & TargetInitiativesFrequency Output: The number of generating force organizations (operating on GFEBS) that are executing quarterly Cost Management process reviews. -Organizations will be defined by Fund Centers within a Command (ACOM, DRU, and select ASCC). -The baseline for number of organizations executing quarterly reviews will be assessed by Command at the beginning of year (assume start point is zero) -Target Set to Achieve 90% of Army Organizations executing Quarterly Reviews by Cost Management Training (Cost Management Certification Course, Cost Mgmt 101, GFEBS Modeling and Deployment) -Issue Survey by Command to Establish Baseline. -Develop requirement linked to GFEBS deployment for conducting Quarterly Cost Management Reviews -Define CP-11 Manpower Requirements to Adapt Workforce for more Analytical Skills Measured Quarterly: Calculated as “ Number of organizations executing quarterly CM reviews / Total number of organizations within command" Output: The number of organizations utilizing Cost Benefit Analysis (CBAs) in making resource-Informed decisions -Organizations will be defined by Fund Centers (for those on GFEBS) or Allotment Serial Number (for those on Legacy Financial Systems) within a Command (ACOM, DRU, and select ASCC). -The baseline for number of organizations utilizing CBAs will be assessed by Command at the beginning of year (assume start point is zero) -Target Set to Achieve 90% of Army Organizations making resource-informed decisions using CBAs by USA/VCSA memo (30 Dec 2009) Directed CBA's are to be prepared (For APGM and TGM, Force Design Updates, Concept Plans, Part of VCSA portfolio analyses, ACP, BRP, AR2B, etc..) -Prepare additional ASA(FM&C) guidance requiring use of CBA practices to support Resource-Informed Decision-Making throughout Army -Continue CBA Training, CMCC and Cost Management Training Across Army Measured Quarterly: Calculated as "Number of organizations utilizing CBA's / Total number of organizations within command" Output: The percent improvement in Cost Management Maturity Model (CM3) score index. -Establish Baseline Index Score by organization -Initial Target Set as % Increase from Baseline by Command (Measure Twice per Yr) than % Increase from Previous Period -Direct Initial Army-wide Assessment using Cost Management Maturity Model Survey to Establish Baseline -Reassess at Mid-Year and Year-End (Annually) Measured Bi-Annually: Calculated as “Percent change In index score from previous period by organization"

Cost Management Maturity Model DRAFT Slide 29

Department of Army Directive Department of Army has directed that all unfunded requirements and new or expanded program proposals be accompanied by a thorough cost benefit analysis Department of Army has directed DASA- CE to review and approve all CBAs Slide 30

SECDEF Guidance for Improved Operational Efficiencies The secretary of defense has directed the military departments, principal staff assistants, combatant commanders and DoD agencies to take deliberate and aggressive measures to protect critical current and future capabilities, ultimately securing real growth in the resources allocated to our warfighters. This direction will be incorporated into service Program Objectives Memorandum 12 submissions by July 30, Secretary Gates established efficiency reduction targets for each of these components and directed that the resources be used to increase funding for personnel in units, force structure and readiness to fight. The reductions also should focus on headquarters and administrative functions, support activities and overhead. The services will be able to keep savings within their budgets and at least two-thirds of the reductions should be transferred to produce increases in funding for personnel in units, other force structure costs, readiness, procurement and research development test and evaluation (RDT&E) accounts. "To sustain necessary investment levels for Department of Defense mission essential activities," said Gates, "we must significantly improve the effectiveness and efficiency of our business operations. Doing so will increase funding available for our mission functions from efficiency savings in overhead, support and non-mission areas." Additionally, the secretary has directed a corporate review of critical support policies that affect the entire department. This effort is not limiting and will include staffs within Office of the Secretary of Defense, the Joint Staff and the Defense Health Program. This program review will conclude in the fall of Slide 31 No June 04, 2010

DoD Substantive Goals Slide 32 $ Billions Total Individual Military Dept Goal (Army, Navy, Air Force) Defense Agency/Field Activity Wide Goal Combined Goal DoD Topline ,997 Focus is on headquarters and administrative functions, support activities and other overhead. Initiatives must be specific, actionable, and measurable. Percentage and across-the-board reductions are not acceptable. Army can keep the savings and apply them to critical areas such as personnel in units, force structure, readiness to fight and investment in future capabilities.

SECDEF Memo 16 August 2010 Four-track approach for efficient, effective, and cost-conscious way of doing business: 1.Shifting overhead to force structure and future modernization 2.Invite outside experts to advise where DoD can become more efficient 3.Conduct front-end assessments for FY12 budget request 4.Reduce excess and duplication across the DoD enterprise Requires a cost estimate for all program and policy proposals within DOD Slide 33

USA Efficiency Memo 2 September 2010 USA to lead Army’s efficiency effort: 1.Near Term: ASA-FM&C to develop framework of efficiency task leads and consolidate responses; Commands to develop efficiencies:  Army to adjust its POM submission  SA to approve final HQDA Resource Management Decision Package prior to submitting to OUSD-CAPE on 29 Oct 10 2.Far Term: Continue efficiency efforts:  Capability Portfolio Reviews  Business Transformation Initiatives  Generating Force Study  Contracting Reform Support  Additional Guidance Forthcoming SECDEF: Culture of Savings and Restraint Slide 34

HON Matiella’s Cost Management Memo 7 January 2011  Army must achieve three cost management objectives: 1.Conduct quarterly cost management reviews by those implementing GFEBS 2.Use Cost-Benefit Analysis (CBA) to make resource-informed decisions 3.Asses your organization’s cost management program by using the Cost Management Maturity Model self- assessment tool  Use your CMCC graduates  ASA-FM&C and PDASA will attend cost and performance AARs Slide 35