this as a cost savings, despite having taken no action itself to reduce cost?
THE PROBLEM OF ‘GRANULARITY’ Finally, there is the issue of the granularity, or the level of detail in the measurement. In his seminal 1984 business novel, “Te Goal: A Process of Ongoing Improve- ment,” Eliyahu M. Goldratt describes a manufacturing plant that bases its success on the sum of the “efficiencies” created by its individual departments, blinding itself to the plant’s overall decline.
Costs are hierarchical: Te cost of a single activity is subsumed into a project, which in turn is subsumed into a higher level, and so on. Te acquisition community may claim financial benefits at the activity level, even though there is no reduction at the project level, because other activities may have increased in cost.
In his 1967 paper, “How Long Is the
Coast of Britain? Statistical Self-Sim- ilarity and Fractional Dimension” (online at
http://classes.soe.ucsc.edu/ ams214/Winter09/foundingpapers/ Mandelbrot1967.pdf), mathematician Benoit Mandelbrot showed the coastline to approach an infinite length based on increasing the granularity of measure- ment. A coastline measured in miles is shorter than the same coastline measured in inches, because the shorter unit allows for the measurement of smaller varia- tions. Te logical conclusion here for the acquisition community is that if we mea- sure and calculate our efficiencies at lower levels of the work structure, we’ll have a greater result than at the higher levels.
Consider the following scenario: A pro- gram manager successfully optimizes part of the program’s fielding plan and frees up money in the current year. Te PM can then procure additional end-item
THE IDEA THAT WE MUST PREFACE A TERM LIKE “COST SAVINGS” WITH A QUALIFIER, AS IF SOME SAVINGS ARE A MIRAGE ... REFLECTS THE IMPRECISION OF OUR TERMINOLOGY AND THE INABILITY OF SOME OF THESE COMMONLY MADE STATEMENTS TO WITHSTAND CAREFUL SCRUTINY.
quantities against the program’s acquisi- tion objective, which is only partially funded in the out-years of the budget.
Te successful reduction in fielding costs is a cost savings at the activity level because it made dollars available for reallocation to another approved purpose. However, the end result at the program level was to reduce a future unfunded requirement, which is a cost avoidance. One might be tempted to issue a blanket policy that all savings will be reported at the program level, but that would leave open the pos- sibility of a PM claiming a savings even if the result is not an overall savings for the Army. Te granularity or reporting by level of hierarchy can not only change savings to avoidance, but also determine whether a cost reduction even occurred.
CONCLUSION Te adoption of a common financial ben- efits model and language for all reported efficiencies is essential to reducing varia- tion and bolstering the credibility of any claim of financial benefit, as well as reducing the risk of double-reporting.
Te Army must identify granularity stan- dards to at least acknowledge and begin mitigating the problem of granularity in financial benefit claims. To some degree, there will always be an element of pro- fessional judgment in such claims, but without acknowledging the problem, there is no possibility of ever coming to a consensus.
Finally, organizations reporting savings should include a description of the usage
of funds saved; for example, by citing an unfunded requirement that was reduced. Without such a description, it is not clear whether the savings are available and could be claimed to pay a bill, or if the reporting organization has already used the funds for an approved purpose internally.
While these steps would not put an end to every debate over cost reductions, they would bring clarity to the conversation. As for the vultures, they can just keep circling.
For more information contact the authors at
jeffret.t.hawkins10.civ@
mail.mil or
Vincent.k.dahmen.civ@
mail.mil.
MR. THOM HAWKINS is the continuous performance improvement (CPI) program director and chief of program analysis for Program Executive Office Command, Con- trol and Communications – Tactical (PEO C3T). He holds a B.A. in English from Washington College and an M.L.I.S. from Drexel University. Hawkins is Level III certified in program management and is an Army-certified LSS Black Belt. He is a member of the U.S. Army Acquisition Corps (AAC).
MR. VINCE DAHMEN is a cost analyst at PEO Ammunition. He holds a B.S. in chemistry from Montclair State University and an M.S. in operations research from Stevens Institute of Technology. He is Level III certified in business financial manage- ment and a member of the AAC.
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