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Identify Similarities Between Battlefield Management and Cost Management Intermediate Cost Analysis and Management © Program of Instruction Overview Week One Week Two Week Three Understanding Cost Learning the Process Applying the Process Accounting Basics Cost Relationships Cost Tradeoffs Cost Projection Cost Explanation Cost Benefit Analysis Cost Control Theory CBA Examples Org Based Control Cost Management Role Based Control After Action Review Output Based Control Cost Management Cases Change Management Why are We Interested in Cost Management? • How many brigade combat teams can you afford if: • Each costs $2B and you have $30B? • Each costs $3B and you have $30B? • Each costs $5B and you have $30B? Unit Cost Total Cost Units $2B $30B 15 BCTs $3B $30B 10 BCTs $5B $30B BCTs © Which provides the stronger Army? Terminal Learning Objective • Task: Identify Similarities Between Battlefield Management And Cost Management • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy • Identify symptoms of the Cost War • Demonstrate understanding and awareness of the purpose and motivations for managerial costing • Describe the importance of Commander’s Intent © Cost Management and Control: National Security Implications • What if the cost of a BCT could be reduced by one-third while maintaining the same effectiveness? • Simplify the math by considering Army Budget to be 30 and initial BCT cost to be ARMY Budget = 30 = 10 BCTs initial BCT cost x x x x x x x x x ARMY Budget = 30 = 15 BCTs 2/3 initial BCT cost x x x x x x x x x x x x x x x x A one-third 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 © Risk to Mission = Cost War • The Cost War is the struggle: • To accomplish and enhance your organization’s mission • With fewer financial resources than you would wish • While meeting specifications for quality, customer service, and ethics © Are You in a Cost War? • Do you need more resources? • Have your budgets been cut? • More than once? • Almost always? • Is your list of unfunded requirements increasing? • Do you have limits on hiring? • Are you getting unfunded mandates? © Assess Before Continuing STOP: You need not proceed if your organization is not in a Cost War GO: Proceed only if your organization is engaged in a Cost War © What are You Going to Do About It? • Alternative 1: Try to get more budget • • • • Better define and document “needs” Highlight deficiencies and problems Contrast funding levels to others’ React to cuts with downsizing, reduced service levels, personnel cuts The old way of doing things © Traditional View of Budget Budget Appropriated Mission Accomplished $ © 10 Cost Measurement’s Influence on Consumption Managerial Costing $ Relevant Costs $ Customized Views $ True Resource Use Cost Command And Control • The Demand Curve - Economics 101 Cost Quantity Demanded © 38 Not Knowing Cost Makes Everything Appear Free Managerial Costing $ Relevant Costs $ Customized Views $ True Resource Use Cost Command And Control • Cost influences consumption • Quantity demanded rises as cost falls • Free goods have infinite demand • Things that aren’t free, but appear free, get overconsumed • Attempts to prevent overconsumption lead to rules, regulations, restrictions © 39 Learning Check • How does demand for a good change as cost decreases? • What is the logical result of not knowing what something costs? © 40 Commander’s Intent Cost Warrior Pull « Command Specification « Command Goal Setting « Command Review Cost Command And Control Process “Commanders must develop and communicate a clear vision or intent” United States Army Field Manual FM 25-101 Battle Focused Training (emphasis added) â 41 Cost Warrior Pull ô Command Specification « Command Goal Setting « Command Review Why is Commander’s Intent Important? Cost Command And Control Process • We are in a dynamic environment • Changing conditions under fog of war • Unanticipated enemy actions/reactions • Unforeseen opportunities and threats • We wish to capitalize on the skills of subordinates who are best positioned to make decisions © 42 Cost Warrior Pull Commander’s Intent « Command Specification « Command Goal Setting « Command Review Cost Command And Control Process United States Army Field Manual FM 25-101 Battle Focused Training © 43 Cost Warrior Pull « Command Specification « Command Goal Setting « Command Review Why is Commander’s Intent Important? Cost Command And Control Process • Commander physically cannot make all decisions • Commander is not best qualified to make all decisions • Command must insure control while reaping all possible advantages of decentralization â 44 Cost Warrior Pull ô Command Specification « Command Goal Setting « Command Review A Military Analogy Cost Command And Control Process • Consider the economy of force sector • Some sectors in the front line are deliberately allocated fewer forces • This permits concentration of force for • The main attack • The secondary attack • The Cost War now places many government organizations in the fiscal economy of force sector © 45 Cost Warrior Pull One Way to Think About Your Options « Command Specification « Command Goal Setting « Command Review Cost Command And Control Process • Grant Me • The Serenity to Accept the Things I Cannot Change; • The Courage to Change the Things I Can; • And the Wisdom to Know the Difference © Resource Level Resource Management Your Decision 46 Cost Warrior Pull « Command Specification « Command Goal Setting « Command Review How Would You Spend Your Time as Commander in the Economy of Force Sector? Cost Command And Control Process • Your time and energy are limited • You must allocate them between: • Going to higher HQ to plead for more resources to increase your effectiveness • Staying at your sector maximizing the effectiveness of the resources you have • Would you: • Spend 80% of your time at HQ? • Divide your efforts equally between the two actions? • Spend 80% of your time in your area of operation making the best of whatâyouve got? 47 Cost Warrior Pull ô Command Specification « Command Goal Setting « Command Review Group Activity Cost Command And Control Process • Break into groups • Address the previous slide’s question Write a one page PowerPoint slide with your Commander’s Intent • Present your statement to the class in 20 minutes © 48 Cost Warrior Pull « Command Specification « Command Goal Setting « Command Review Commander’s Intent: Leadership Foundation Cost Command And Control Process • Development of clear vision and intent is key to: • Leading the continuous improvement process • Developing and institutionalizing the cost based performance management process and needed cost measurement capabilities © 49 Cost Warrior Pull The Leader’s Evolution of Cost Thinking « Command Specification « Command Goal Setting « Command Review Cost Command And Control Process Recognition that continuously reduced resources have become a way of life Awareness that sound management of resources has become more important Search for a workable management paradigm becomes critically important Development of actionable measurement capability becomes indispensable © 50 Cost Warrior Pull The Leader’s Objective in Cost Management « Command Specification « Command Goal Setting « Command Review Cost Command And Control Process • Change culture to one which: • Aggressively seek better ways to operate • De-emphasize defense of past practice (assumed best practice at that time) • Require and expect development of continuous improvement initiatives • Today, tomorrow, next week, next month, next year, forever © 51 Learning Check • Why is Commander’s Intent important? • What does it mean to be in the fiscal economy of forces sector? © 52 ... $2B $30B 15 BCTs $3B $30B 10 BCTs $5B $30B BCTs © Which provides the stronger Army? Terminal Learning Objective • Task: Identify Similarities Between Battlefield Management And Cost Management... Not Cost Savings Budget Appropriated $ Manage ment $ Better Mission Execution $ $ Redirected Efficiencies 13 © Top 10 Reasons Government Orgs Manage Cost 10 Enhance Mission Execution Enhance Mission... this job © 18 Can Government Manage? • Many believe “Government Management” is an oxymoron • Do you? • Academics typically cite: • Lack of profit motive History of government spending â 19 How Important