‘Better Buying Power’ Can Reduce Costs Without Slashing Industry Profits
The latest update, BBP 3.0, was released on Sept. 19 to further push forward and promote this important initiative.
Kendall noted that significant progress has been made in selected areas of the should-cost analysis, a key component of BBP.
Kendall’s assertion that should-cost approaches have delivered significant savings to programs is accurate. The BBP initiative has improved Defense Department acquisitions. However, as Kendall emphasized, additional work is needed to firmly embed BBP tools such as should-cost analysis into Defense Department acquisition culture.
Three key areas can help drive adoption and embed should-cost analysis into the Pentagon’s acquisition system: people and training, tools and processes, and leadership.
Complex categories like software serve as a relevant case study.
Both Kendall and Richard Lombardi, now principal deputy assistant secretary of the Air Force for acquisition, have cited how the F-22 air superiority fighter program leveraged strong should-cost techniques to deliver benefits that align with many of BBP’s objectives.
F-22 program leaders made the software should-cost initiative a collaborative effort between the Defense Department and its suppliers, showing how the contractors could improve profits while helping the department develop a highly advanced weapon program at a reduced cost.
The initiative resulted in profits for the suppliers and savings of $66 million for the government from the initial contractor proposal.
Acquisitions organizations across the Defense Department need well-trained employees with the appropriate technical skills to find opportunities for reducing costs within a contractor’s proposal.
But today employees need more than just these skills. They also need the ability to drive a thorough should-cost analysis, not just cut a percentage off the contractor’s bid.
Therefore, defense acquisitions organizations must be able to deliver training on quantitative and technical skills, domain content and should-cost skills.
The should-cost training must focus on the tools and processes employees need to understand the deep analysis and how it can benefit their program. Such training will help them circumvent the confusion generated by the many definitions of “should-cost” used throughout the private and public sectors.
Focusing on these tools and processes is a better approach to understanding and embedding should-cost and to building the analysis both from the bottom up and from the top down — which compares the program against similar programs.
In software, for example, a should-cost analysis is driven by multiple tools and processes such as modeling. Use of standard modeling tools such as SEER-SEM (SEER for Software) and COCOMO (Constructive Cost Model) in aviation should-cost initiatives can help estimate the software effort and shape optimal schedules.
Bottom-up estimation models each activity’s component costs against specific industry benchmarks and cost drivers.
Another tool is contractor comparison. This compares similar contractors to determine industry best practices and should-costs. There is also program comparison, which estimates costs by benchmarking similar services and common mission profiles across a comparable scope of work.
Defense Department leaders play a key role in embedding should-cost across the department and within individual programs, with affordability being a major incentive.
The best way to embed should-cost into the culture is by actually conducting the analysis, not just talking about it. Therefore, leaders must identify the programs that can pilot should-cost, selecting those with skilled people who are trained on should-cost tools and processes.
There are other actions that leaders should take such as bringing the best practices to bear. Encourage team members to aggressively challenge the status quo and ask “what if?” and “why not?” to replicate the best practices available, and to determine the most effective cost-to-deliver program requirements.
Performing rigorous analysis allows leaders to understand the root-cost drivers and efficiency potential for major areas like supply chain and manufacturing.
Establishing the right incentives helps the team work collaboratively with suppliers. Implement incentives that encourage everyone to move beyond the status quo and work in a way that lowers government costs and improves suppliers’ profits.
Also, convert cost-management opportunities into realistic action plans with clear time lines and responsibilities. Use multiple approaches — negotiation, investment, joint-process improvement and contract restructuring — to reduce costs.
Finally, track performance against the cost-reduction plans. Implement a target assurance program to identify cost-reduction targets and milestones. Review progress regularly and make sure progress is transparent and well managed.
In short, successful should-cost analysis requires well-trained employees and engaged leaders.
Christian Hagen is a partner with A.T. Kearney’s strategic information technology practice in Chicago.