1. Identify Similarities Between Battlefield Management and Cost Management ©1

2. Program of Instruction Overview Understanding Cost Applying the Process Learning the Process Accounting Basics Cost Relationships Cost Tradeoffs Cost Projection Cost Explanation Cost Control Theory Org Based Control Role Based Control Output Based Control Change Management Week One Week Three Week Two

3. 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? ©3 Which provides the stronger Army?

4. 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 ©4

5. 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 3 © 5 ARMY Budget 30 initial BCT cost 3 = = 10 BCTs ARMY Budget 30 2/3 initial BCT cost 2 = = 15 BCTs 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 xxxxx xxxxx xxxxx xxxxx xxxxx

6. 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 ©6

7. 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? ©7

8. Assess Before Continuing STOP: STOP: You need not proceed if your organization is not in a Cost War GO: GO: Proceed only if your organization is engaged in a Cost War ©8

9. 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 ©9 The old way of doing things

10. Budget Appropriated Mission Accomplished $ $ Traditional View of Budget ©10

11. Traditional View of Budget ©11 Budget Appropriated Mission Accomplished $ $

12. What are You Going to Do About It? Alternative 2: Manage cost better Seek, but don’t count on, budget increases Develop a cost management paradigm Measure costs as needed Motivate a culture of continuous improvement in productivity Reprogram/redirect savings to self fund needs ©12 What This Course is All About

13. $ $ Budget Appropriated Manage ment Better Mission Execution $ $ $ $ Redirected Efficiencies $ $ Payoff: Better Execution, Not Cost Savings © 13

14. Top 10 Reasons Government Orgs Manage Cost 1.Enhance Mission Execution 2.Enhance Mission Execution 3.Enhance Mission Execution 4.Enhance Mission Execution 5.Enhance Mission Execution 6.Enhance Mission Execution 7.Enhance Mission Execution 8.Enhance Mission Execution 9.Enhance Mission Execution 10.Enhance Mission Execution ©14

15. Productivity: Getting More Mission for Less Cost Private sector productivity is the cornerstone of recent economic success National statistics show sustained 3-4% annual rate of productivity improvement What did you pay for your first calculator? iPod? Cell phone? Computer? ©15

16. Conclusion: The Cost War Period of plenty (The Cold War) is over Period of limited resources (The Cost War) has begun Losing the Cost War will result in excessive loss of mission capability or missed opportunities for enhancement Winning the Cost War Requires a strong cost management process and a culture of continuous improvement ©16

17. Learning Check You know you’re in a Cost War if…..? What are the two alternatives for dealing with reduced resources? ©17

18. Assess Before Continuing STOP: STOP: Do not proceed if you would emphasize resource acquisition or if you don’t want this mission GO: GO: Proceed only if you wish to more efficiently use the resources you have and you want this job ©18

19. Can Government Manage? Many believe “Government Management” is an oxymoron Do you? Academics typically cite: Lack of profit motive History of government spending ©19

20. How Important is Profit Motive? Most managers in corporations are not profit managers Cost center managers outnumber profit center managers 40 or 50 to 1 Owner control is typically weak unless an individual owns a large share block Probably not much different than power of voters in political elections ©20

21. Can Government Manage? History of last 60 years of Government spending Cited as evidence by skeptics of Government’s inability to manage Used here as rationale that Government has not needed to manage ©21

22. Government Management Improvement Strategies ©22 A-76A-76 Business Process Reengineering Budget Mgmt PART PART Cost Management & Control Processes Centralized Decentralized DiscontinuousContinuous

23. Requirements for Cost Management and Control Cost Data: Cost Data: Providing the raw materials needed for decision making and process Process: Process: Institutionalizing a method of stimulating continuous improvement Cost Staff: Cost Staff: Translating data into information Leadership: Leadership: Driving management, setting and achieving intent ©23

24. Cost Management & Control Processes Must Require frequent management attention Stimulate learning: frequent feedback Generate goals that challenge Encourage performance to meet goals Eliminate entitlements Create continuous improvement culture Emphasize constant reduction of needs ©24

25. Battlefield Management Provides a useful template for cost management Good military commanders are inherently cost conscious in achieving missions Minimize cost in casualty losses Minimize cost in resources and capabilities Good financial managers must also be cost conscious in achieving their missions ©25

26. Battlefield Management Unique to government management arena No profit motive exists We’re pretty good at it Command, control, and communication paradigm provides a useful template for cost based management ©26

27. Cost Command and Control Process Battlefield Intelligence becomes Managerial Costing Warrior Pull becomes Cost Warrior Pull Modeling and Simulation becomes Cost Planning After Action Review becomes Cost After Action Review Command, Control, and Communication of Cost © 27

28. The Role of Cost Planning Provides proactive alternative to annual budget crisis Stimulates learning/training in financial consequences of alternative actions cheaply Provides a basis to evaluate mission success Clarifies short term assignments ©28 Cost Command And Control Cost Planning  Cost Projection  What- Iffing  Ad Hoc Analysis

29. The Role of the Cost After Action Review Document and explain performance Evaluate performance and create accountability Stimulate learning for: Better reconnaissance Better planning Better execution ©29 Cost Command And Control Cost After Action Review  Performance Measurement  Fixed Accountability  Continuous Improvement

30. The Role of Cost Warrior Pull Specify managerial costing requirement Perform intelligence prep of the battlefield Determine essential elements of info Lead the cost management process Set the agenda Negotiate and approve plans Critically review execution Signal the importance of cost management ©30 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

31. Cost Command And Control The Role of Managerial Costing Develop needed intelligence for the cost manager fighting the cost war Needed: credible measurement of true costs of resource consumption Provide information to the cost management process Needed for decision making, planning processes, and after action reviews ©31 Managerial Costing  Relevant Costs  Customized Views  True Resource Use

32. Learning Check Why is “lack of profit motive” not an excuse for not managing cost in government? What is the role of the Cost Warrior? ©32

33. Costing Systems Differ Goals: Consistency Comparability EquityUsers: Shareholders Congress Regulators Tax Authorities Methodology Methodology: Laws Rules GAAP Goals: Fit Functionality RelevanceUsers: ManagersMethodology: Situation Dependent Financial & Regulatory Managerial ©33 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

34. Managerial Cost Accounting Seeks to understand true economic cost Based on cause-effect relationships Reflecting drivers of resource consumption With reasonable, but not precise, accuracy Enables cost based management for continuous improvement Enables better decision making Enables rational consumption behavior ©34 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

35. Why Do Managerial Costing? 1.Enhance decision making 2.Provide reconnaissance necessary for Cost Based Management process 3.Influence resource consumption behavior ©35 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

36. 1. Cost Measurement’s Role in Decision Making Which Metal is Best for Transmission? Metal AMetal BMetal C Conductivity + ++ +++ ©36 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

37. 2. Cost Managed Orgs Need Cost Measurement Cost managers must have cost measurement to fight Cost War Cost measurement Informs Cost Warriors of financial implications of management decisions Provides a basis of accountability Is prerequisite to cost reduction ©37 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

38. 3. Cost Measurement’s Influence on Consumption The Demand Curve - Economics 101 Cost Quantity Demanded ©38 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

39. Not Knowing Cost Makes Everything Appear Free 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 Cost Command And Control Managerial Costing  Relevant Costs  Customized Views  True Resource Use

40. Learning Check How does demand for a good change as cost decreases? What is the logical result of not knowing what something costs? ©40

41. Commander’s Intent “Commanders must develop and communicate a clear vision or intent” --United States Army Field Manual FM 25-101 Battle Focused Training (emphasis added) ©41 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

42. Why is Commander’s Intent Important? 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

43. Commander’s Intent © 43 --United States Army Field Manual FM 25-101 Battle Focused Training Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

44. Why is Commander’s Intent Important? 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 ©44 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

45. A Military Analogy 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

46. One Way to Think About Your Options 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

47. How Would You Spend Your Time as Commander in the Economy of Force Sector? 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 what you’ve got? ©47 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

48. Group Activity 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

49. Commander’s Intent: Leadership Foundation 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

50. The Leader’s Evolution of Cost Thinking 1.Recognition that continuously reduced resources have become a way of life 2.Awareness that sound management of resources has become more important 3.Search for a workable management paradigm becomes critically important 4.Development of actionable measurement capability becomes indispensable ©50 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

51. The Leader’s Objective in Cost Management 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 Process Cost Warrior Pull  Command Specification  Command Review  Command Goal Setting Cost Command And Control

52. Learning Check Why is Commander’s Intent important? What does it mean to be in the fiscal economy of forces sector? ©52