Improving Cost-Effectiveness in the Department of Defense
Miller, Drew, Air & Space Power Journal
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In signing the latest and largest Department of Defense (DOD) budget, which cut the Air Force's F-22 and the Army's Future Combat Systems, Pres. Barack Obama proclaimed, "We can't build the 21stcentury military we need unless we fundamentally reform the way our defense establishment does business."1 Reforming the DOD and achieving more businesslike costeffectiveness- long-standing goals for the DOD- are often rejected as impossible since the military is not a for-profit business. Lack of a profit bottom line, however, does not prevent the DOD from attaining the cost-effectiveness that many nonprofit government and military organizations enjoy. Management consultant Peter Drucker called one nonprofit organization, the Salvation Army, "by far the most effective organization in the U.S." He noted that "no one even comes close to it with respect to clarity of mission, ability to innovate, measurable results, dedication, and putting money to maximum use."2
One of the biggest hurdles to improving the DOD's cost-effectiveness is the lack of a simple, consistently used means of decision making. The department needs a standard decision support system (DSS) akin to business's profit-and-loss spreadsheet to replace the current practice of decision making without clear criteria. Another great plague on military cost-effectiveness is our "stovepiped" approach to planning, programming, and budgeting with changing bases for the analysis and no chain of accountability or penalty paid, either for cost overruns or poor performance relative to plans. Donald Rumsfeld, former secretary of defense, estimated that 25 percent of the DOD's spending is wasted.3
The Air Force and DOD can improve their cost-effectiveness with some practical reforms, including adopting and consistently using our version of business's ubiquitous profit-and-loss spreadsheet to realize the tremendous benefit that businesses enjoy from having a common, widely used, and understood means of analysis and decision making. By employing a simple multiple criteria decision making (MCDM) tool such as the one developed by RAND, which uses commercial spreadsheet software, the DOD could reap the advantages of improved analysis, enhanced accountability for results, and more cost-effective resource management.4
Nearly all corporate business decisions are made using a spreadsheet, the "ubiquitous" "core piece of software" that "is utterly pervasive . . . [and] integral to the function and operation of the global financial system."5 The familiarity and constant use of the income-statement spreadsheet as a common language and tool enable much better analysis and decision making in business organizations. The DOD, however, has no common format or DSS, using only PowerPoint as a support tool. The department makes its decisions on billion-dollar programs with a horrible lack of consistency and quality, without adequate transparency of estimates and analysis, and with no record of the criteria and rationale used to provide accountability. Unsurprisingly, this results in poor cost-effectiveness.
The most important factor in costeffectiveness for business is not profit but a system that enables real accountability and consequences for measurable results. Profit, return on investment (ROI), discounted cash flow, or net present value are just the chosen metrics for making decisions and tracking results. To establish cost-effective management and decision making, the DOD can use corresponding means to business's nine enablers of cost-effectiveness (see table).
The DOD has been working for a decade to adopt "capabilities based planning," a common framework for planning and managing resources. …