Management
May 29, 2015

Agile defence: Five areas for sustainable cost reduction

In 2011, PricewaterhouseCoopers began a conversation with global defence leaders on the concept of “agile defense” – reconciling tensions created by ever-evolving threats, increasing reliance on technology, and tighter defence budgets for most nations and alliances.

Specifically, budget pressure, and a mandate for cost reduction, can serve as a catalyst for greater defence agility and how defence organizations can promote, rather than undermine, agility characteristics as they seek to simultaneously reduce costs, accomplish current missions, and build future capabilities.

Since 2011, budget pressures have forced defence organizations to reduce spending dramatically, though security threats remain unabated. Canada’s armed forces identified the need to cut $1 billion by 2017 through business transformation, terminating civilian jobs, reducing contractors, and retiring obsolete weapons systems and vehicles. The Department of National Defence’s Defence Renewal program was initiated to establish the conditions for continuous improvement while minimizing inefficiency, streamlining business processes and maximizing operational results.

These contrary dynamics of agility versus cost reduction raise questions about the future structures and capabilities of defence organizations. Perhaps there is no better question in the next several years than this one: “Can we reduce costs without sacrificing agility?”

Sustainable cost reduction as an ‘agility accelerator’
Traditionally, cost containment initiatives in the defence sector have had short-term results, repeatedly targeting the same operating and maintenance expenses. These approaches fall short if they do not deliver transformation that in turn enables substantive, permanent reduction in operating costs. Otherwise, the nation’s ability to achieve mission requirements both locally and abroad is degraded. Worse, over time costs typically re-emerge. So what has been achieved? The defence organization may have achieved lower costs in the short term, but has sacrificed agility in exchange.

Instead, there is a need to focus cost reduction efforts in areas that strengthen and reinforce five threads of agility: visibility, velocity, adaptability, collaboration, and innovation.

This period of dynamic change and long-term resource restriction demands creative solutions. The opportunity exists to eliminate constraints previously seen as fixed by politics, policy, or organizational inertia. Defence organizations that sacrifice agility to cut costs will inevitably re-learn the painful lessons related to eras of demobilization followed by intense and costly remobilization.

PwC has identified 12 actions for defence organizations to establish and maintain agility while reducing costs:

1. Assemble decisive leaders who are simultaneously visionary, inspirational, and pragmatic;
2. Define and maintain a focus on the ultimate outcomes your organization must achieve;
3. Employ lean processes and governance to set your strategy and monitor execution;
4. Ensure that you accurately understand resource drivers and key cost areas;
5. Target cost areas that hold promise for sustainable savings;
6. Establish outcome-focused metrics and take action based on results;
7. Empower subordinates and hold them accountable for results;
8. Establish forums focused on challenging strategy, programs, and underlying assumptions;
9. Maintain appropriate balance on near-term wins and long-term transformational results;
10. Remember that innovation entails failure and forgiveness; if you are not cancelling initiatives, you are either not innovating or not recognizing when initiatives should be terminated;
11. Make hard trade-off choices and do not spread resources too thin – you are not looking deep enough if you are not having to make tough choices; under-investment in programs often generates more risk than eliminating programs or mission capabilities; and
12. Evaluate your strategy, programs, and processes against their effects on the five agility threads.

All public sector organizations struggle with maintaining agility while simultaneously reducing costs. Often transformation programs are started but the organization is unable to embed the new capabilities and “make change stick” because of, for example, high turnover and the rotational nature of military careers. In addition, organizations are not always incented to create sustainable efficiencies – the focus is short term. Only when change is embedded into the fabric of the organization will sustainable results be achieved.

Many organizations dive into cost reduction without understanding which areas hold the most potential for sustainable savings, the factors that drive costs, and the interdependent relationships between costs and organizational outcomes. In most organizations a few areas hold the most promise for significant cost reduction while also supporting greater agility. Our approach is focused on achieving complimentary improvements in five cost areas. Within each cost area, we identify proven techniques that provide the most promise for sustainable reductions.

1. Human capital
Unpredictable economic conditions emphasize the need for streamlining operations and optimal employment of people in most defence organizations. Changing technology and strategic restructuring require new and different skills and knowledge. This has resulted in increasing organizational costs and associated costs of maintaining workforce readiness.

Three areas that provide promise for sustainable cost reduction:

• Workforce–mission alignment;
• Capabilities-based assessment and workforce analytics; and
• Blended learning and cross-training

2. Infrastructure costs
To achieve sustainable cost reduction and agility defence organizations must fully understand the total lifecycle cost of infrastructure and how to determine the minimum levels of infrastructure investment required to support mission requirements. Today for most organizations this is complicated because data is housed in multiple systems and documents. Considerable time and resources are used to discover, collect, manipulate and maintain this information for effective decision-making. The four proven approaches listed below are designed to equip defence installation commanders and managers with the necessary information and decision management framework to ensure that they know what they have, where it is located, what condition it is in, who is using the facility and what it costs:

• Reliability centered maintenance;
• Asset and IT inventory management;
• Smart grid, facilities and installations; and
• Joint basing/infrastructure sharing.

3. Information technology
The past decade has seen a surge in IT spending to keep pace with defence, security and financial reporting requirements. The introduction of new delivery models (e.g., outsourcing, shared services) complicate the landscape. IT departments are under pressure to deliver faster and more cost-efficient products, yet most defence organizations are dissatisfied with the return on IT investment. New threats such as cyber terrorism are causing additional burden on defence organizations to not only protect themselves internally, but to offer guidance and policy to aid their country’s commercial sector in warding off attacks.

We offer four techniques that could provide promise for sustainable reduction:

• Prototyping and agile development;
• Cyber and information assurance;
• Business intelligence; and
• Data strategy and optimization.

4. Acquisition and procurement
Defence organizations manage a more diverse and complex capital investment portfolio as compared to most government and commercial enterprises. Complexities of delivering sea, land, and air platforms require continuous coordination with internal and external stakeholders. Consolidation of duplicated contracts, increased standardization in procurement processes, and strict compliance with policy and regulations are critical outcomes that underpin the coordination.

Organizations that employ four techniques to evaluate their portfolio of programs throughout each acquisition phase are more agile and better able to adapt to changing requirements:

• Cost estimation;
• Priority-based budgeting (PBB);
• Industrial base analysis and supplier integration; and
• Strategic sourcing.

5. Supply chain logistics
While logistics and supply chain planning are enterprise-wide activities, many defence organizations approach them in silos. Optimized enterprise supply chain and logistics capabilities require a holistic approach to equipping and operating platforms and weapons systems.

Achieving this holistic approach requires an integrated and balanced perspective guiding readiness with all supply chain and logistics elements. These elements must be properly planned, resourced, and proactively managed.

We offer four techniques that provide the most promise for sustainable reductions:

• Best value maintenance;
• Supply chain optimization;
• Total ownership cost reduction; and
• Burden sharing.

A continuous journey
If efforts to reduce costs in these five areas are led by inspired leaders, and approached methodically with an unrelenting focus on impact on organizational agility, they can accelerate change and lead to a more agile defence organization.

Armed forces will continue to be asked to do more with less. The path to achieving and maintaining agility while reducing costs is complex. It has been said that “it is the journey, not the destination…” Targeting and deploying quick and sustainable wins along the way should be embraced and celebrated.

Identifiable cost-cutting, when properly structured, can lead to greater organizational agility, increased combat readiness and capabilities while maintaining traditional military values of innovation and pragmatism.

 
For further information, please see Agile Defense: Sustainable Cost Reduction on the Path to Greater Agility at www.pwc.com/agiledefense.

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OTTAWA, July 31 – CPA Canada, (Chartered Professional Accountants of Canada) announced their Public Sector Conference ,...