SPEAKING OF SAVINGS
T
he current fiscal environment is driving many con- versations about efficiency and cost reductions, but some of for years.
the statements made have been around
We’ve all heard the dire warnings about how best to define a cost reduction, such as: “Call it ‘cost avoidance’ because ‘cost savings’ is an invitation for someone to take your money away.” Cer- tainly that has happened, and such anecdotes abound. One can readily imagine a cartoon featuring a pair of vultures circling a cost reduction, arguing about whether it’s an avoidance or a sav- ings before swooping down to devour the carcass.
Another common statement is some version of: “I don’t mean that kind of cost savings. I mean real cost savings.”
Te idea that we must preface a term like “cost savings” with a qualifier, as if some savings are a mirage (imagine disappointed vultures), reflects the imprecision of our terminology and the inability of some of these commonly made statements to with- stand careful scrutiny. With the high visibility and high stakes now associated with reporting efficiencies, the time is ripe to examine the terms at our disposal and to offer a few recom- mendations for how the acquisition community might present a clearer, more credible picture of financial benefits.
BASIC DEFINITIONS In light of the history of confusion surrounding the terminology of cost reductions, it is prudent to begin by reviewing the basic definitions and the authority of their source.
Army Regulation 11-18, governing the Army’s Cost and Eco- nomic Analysis Program (online at
http://www.apd.army. mil/pdffiles/r11_18.pdf), the assistant secretary of the Army (financial management and comptroller) (ASA(FM&C) has overall responsibility for the program. ASA(FM&C) is charged with leading all economic analysis activities and policymaking for the Army and provides definitions of the key terms in both the “Department of
the Army Economic Analysis Manual”
(February 2001; online at
http://asafm.army.mil/Documents/ OfficeDocuments/CostEconomics/Guidances//eam.pdf) and the more recent “U.S. Army Cost Benefit Analysis Guide,” 3rd edition (updated April 24, 2013; online at http://asafm.
army.mil/Documents/OfficeDocuments/CostEconomics/ guidances/cba-gd.pdf).
Te following definitions are from the “Cost Benefit Analysis Guide,” and are also used in the Army Lean Six Sigma Financial Handbook (Version 7, 15 October 2011):
Cost reduction. A reduction in the number of dollars needed to meet a customer-established requirement by improving a process or function.
Savings. A cost reduction that enables a manager to reallocate funds within the budget or program period.
Cost avoidance. Any cost reduction that is not savings.
Although the definitions are formulated somewhat differently by various sources within ASA(FM&C), the basic meaning is fairly clear. A cost reduction is based on requirements: If the reduced requirements were funded, that is a savings, because
BLACK BELT
A cost reduction is based on requirements. If the reduced requirements were funded, that is a savings. If they were not, it’s an avoidance. Here, student CW2 Kirkland Bell, standing, moves customer orders and other processing documents during training practical exercise at an LSS Black Belt certification course, Mar. 4, at Fort Bragg, NC. The course is sponsored and taught by the U.S. Army Forces Com- mand (FORSCOM), G-8, Business Readiness Improvement Division and the U.S. Army Reserve Command G-8, Continuous Process Improvement Office. (U.S. Army photo by Bob Harrison, FORSCOM PAO)
160
Army AL&T Magazine
October–December 2013
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