Military Needs Better Cost Data

hile most federal agencies are cutting back to core competencies, the Marine Corps is working hard to develop a new one: financial management.

"Business concepts have never really been core concepts for the Marine Corps," said Col. Dave Clifton, speaking at a seminar sponsored by ABC Technologies in Washington recently. As head of the Installation Reform Office at Marine Corps headquarters, Clifton is leading the effort to change that by developing reliable, accurate cost data for virtually every activity performed across the Marine Corps.

Through activity-based costing-an accounting tool designed to break down in detail the costs of all activities, from taking phone messages to running dining facilities to conducting military training-military leaders hope to improve base operations and cut costs. The assumption is that such detailed information will give installation managers the information they need-and have historically lacked-to make sound business decisions.

Marine Corps leaders believe they can achieve $33 million in savings by implementing activity-based costing across the service's 16 installations, Clifton said. But without high-level civilians trained and committed to improving business management, such savings won't likely be achieved. "If we don't pay the bills in the force structure to get the guys there who can make this a first-class effort, it won't happen."

Room for Reform

Sound financial management is perhaps nowhere more difficult than at the Defense Department. With more than $1 trillion in assets and a budget that amounts to about half the government's discretionary funding, the department faces profound challenges in managing its resources. For years, financial management at DoD has appeared on the General Accounting Office's list of areas at high risk for waste, fraud, abuse and mismanagement.

The central problem facing DoD is that the department's financial management systems were not designed to capture the full cost of activities and programs. Throughout the 1990s, DoD has been consolidating and upgrading its hundreds of financial systems, but the work is still very much in progress and reliable cost data is still very difficult to come by.

And gathering reliable cost data is becoming ever more critical. As the department faces shortfalls in funding for modernization and for operations and maintenance, managers at lower and lower levels are feeling the pressure to cut costs and justify spending. While it appears unlikely that DoD will relinquish its place on the high-risk list anytime soon, one significant area of reform has been in activity-based costing. "This is about radical change," said Daniel Viglianco, an audit manager at the Army Audit Agency involved in implementing activity-based costing across the Army's Forces Command.

The FORSCOM program, begun three years ago and one of the first in DoD, has been instructive. While the hardware and software challenges represented by the department's reliance on antiquated finance and accounting systems are not trivial, the cultural challenges have been greater, Viglianco said. He notes three factors that need to be understood before an organization embarks on activity-based costing:

• Greater cost visibility threatens both managers and workers.
• Implementation is a long-term, extended effort that must receive sustained attention.
• The value of implementing activity-based costing will depend on managers' willingness to make decisions and changes.

"Everybody believes that what they do is value-added," said Viglianco. The challenge is getting people to accept the fact that some work is not value-added. He cited an example of a club manager at one installation who was charging $5.50 for lunch, when the cost data showed it actually cost more than $7 to serve lunch. The club manager's response was to serve more meals. The installation manager's response was to contract out the service.

Not by Costs Alone

But the value of activities cannot always be determined by the cost data alone, Viglianco cautions. Costs of operating child-care facilities on FORSCOM installations were determined to be about twice as high as facilities in the private sector. Child-care workers were being paid higher salaries and the ratio of caregivers to children was higher. But Army leaders decided the activity should be kept in-house, because the quality of care and the morale-boosting effect of the activity were worth the higher costs. However, cost data also showed that child care centers could be run more efficiently with fewer layers of management and a different registration system.

One of the greatest values of activity-based costing is that it attaches a cost to goods and services that is usually invisible to bureaucrat, says Dale Geiger, an expert on government managerial cost accounting systems who teaches at George Washington University. "When the cost of something becomes apparent, it's less likely to be squandered," he says.

Geiger dismisses naysayers who suggest government officials can't manage finances effectively because there's no profit in it. "There's no profit in battlefield management, but we're pretty good at it. The same doctrine applies to base management."