Transforming cost improvement from a tooth-to-tail mentality: this author stresses the need to do careful analysis to ensure that funding goes to areas providing greatest value without regard to accounting definitions.

Background

Transformation has become a central focus of change within the Department of Defense (DoD). Ever-increasing competition for federal funding has caused the DoD, indeed, all federal agencies, to search for new ways of responding. Given the budget pressure of the war on terrorism and the infrastructure costs to rebuild from the recent natural disasters in Louisiana and Texas, this competition for budget dollars is certain to increase.

Private businesses frequently focus on cost reduction in an effort to maintain profits and a return on owners' investment. Government agencies similarly have been faced with pressures to provide ever-increasing value in return for taxpayer dollars. Both business and government often target the reduction of overhead costs in their response to increasing costs. In fact, many cost reduction efforts in the past decade have focused exclusively on overhead and indirect costs. However, it is fair to ask why there should be such a focus on overhead costs.

A need to maximize the use of limited resources to achieve organizational objectives is common among for-profit, not-for-profit, and government organizations. How has the DoD sought to address cost reduction challenges, and to what extent has there been a focus on indirect costs?

Cost Reduction in DoD

DoD's mission is to provide the military forces needed to deter war and to protect the security of our country. This mission is accomplished through the combat capability that the United States is able to deliver wherever needed around the globe. Because many billions of taxpayer dollars are needed each year to enable and sustain this capability, efforts to improve the cost effectiveness of the DoD can have large savings for the country and the taxpayer.

However, savings resulting from decreased mission capability can potentially be counterproductive. Much of the focus on cost effectiveness has therefore been to decrease the cost of support functions without decreasing the actual capability of the fighting forces. This has led to the concept of …