The Defense Department is expanding its focus on the cost of goods and services beyond the “should-cost” concept.

The goal is to understand how much military services and agencies spend on people, technology and processes, and then use that information to improve decision making and to become more efficient.

The concept of “should-cost” mainly focuses on the fair and reasonable price of a product or service. DoD has been pushing the “should-cost” idea through its Better Buying Power initiative.

Beth McGrath, the DoD deputy chief management officer, said the idea is to move cost beyond just contracting and stretching it across the entire DoD business process.

“We’re extremely good at building budgets and so budget formulation, we excel at, and even execution we are getting better and better at really driving and understanding [how] the execution is tied back to the budget,” she said after speaking at the Excellence in Government conference, sponsored by Government Executive magazine, in Washington Tuesday. “But then to shift the conversation and look through a different lens around cost is something industry does every day, but government doesn’t necessarily do. So frankly it’s an industry best practice we are trying to bring in.”

Changing the culture

McGrath said DoD is bringing in a variety of businesses to discuss how they apply this best practice and create a “cost culture.” She said the goal is to understand the costs that are driving operations and how it impacts performance.

McGrath said DoD established an integrated business framework in April as required under the 2012 Defense Authorization bill as a way to expand the concept of cost. She signed out a memo to military leaders detailing an approach to analyzing business system investments by portfolios, and to better manage capital planning and investment control processes.

“The Integrated Business Framework provides an overarching process to manage the department’s business operations from the creation of strategic objectives through the measurement of outcomes,” the process guide stated. “It enables the Defense Business Council to manage the entire CPIC process, align strategies to outcomes, and improve agility and decision-making. The framework is designed to facilitate a cross-functional, enterprisewide view for the governance of portfolios of defense business systems investments for review and certification.”

Moving money from old to new

McGrath said the goal is to move hundreds of millions, if not billions, of dollars in IT system sustainment costs to development or modernization.

“Using the framework, as people say they need a new IT system, we will say, ‘Can you give me the rest of the conversation? What are the current costs of your operations? What outcomes are you trying to achieve? Do you have a return on investment for your planned IT?'” she said. “And that is really driving a culture change, both an education and ensuring we can articulate mathematically, fact- based what the return-on-investment is.”

McGrath said the discussion around cost is not related only to procurement.

There is a growing concern in industry around the use of lowest-cost, technically acceptable evaluation factors. Many contractors believe DoD is the biggest proponent of this approach, which gets away from more than a decade where “best- value” was considered the optimal approach.

McGrath said she’s not a proponent of lowest cost at all costs.

“The best value conversation is the right one to have. But understanding the cost of your business is something I think the department can really make progress in,” she said. “Labor is a cost. IT is a cost. There are things that drive the respective business areas, so it’s figuring out what those are and making sure you have the right amount. What I’m asking people to understand (is) what are their cost drivers and take the appropriate actions.”

99 systems to be terminated

The reason for this focus on cost drivers is DoD has more than 1,200 business systems and is spending $7 billion a year to support them. As budgets continue to tighten, the Pentagon believes it has a real opportunity to move money from these systems to other higher priority areas, while also reducing duplication.

The framework is intended to make that change happen more quickly. Last year, military services and agencies identified 99 business systems to eliminate by 2015. The business review board also denied more than $300 million in IT systems request in the fiscal 2013 budget.

McGrath said these systems weren’t aligned to strategy.

“What we asked was each one of the business line owners define what their strategies are,” she said. “Then we asked the components to align their IT investments to the strategy. If you don’t align, perhaps you’re not needed. We gave them the ability to identify systems for retirement. Again, it’s tying the IT to what are you trying to do, what’s your strategy, what’s your outcome? If you can’t tie to it, frankly, it makes it a pretty short conversation about the continued investment.”

For the fiscal 2014 budget request, DoD components will have to describe how the investment aligns with the business owners’ strategy.

“This year I established a 10 percent reduction in the sustainment bill,” McGrath said. “I’d rather that money go toward the investment to the new. That was tough for some people to swallow, but everybody is looking for money and they want to do it in a smart and strategic way. We are highly motivated and incentivized from an IT perspective to keep what we need and get rid of what we don’t.”

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