Cost Management

Driving to a Centralized, Standardized CFO Function

CFO

Financial Compliance / Decision Analytics on Decision Analytics on

Role

Reporting Control Financial Performance Mission Performance

• Sound transaction processing • Provide assurance on • Perform cost management • Link cost performance data
• Creation of traditional finance strength of internal controls analysis to related priority mission
Performed
Analytics

reports (e.g., balance sheet) and risk management • Provide resources for objectives
processes performance review • Partner on cost and mission
analytics

~ Annually ~ Quarterly ~ Monthly or better ~ Daily / Real time / predictive

Time

Distributed, non-standard Distributed, standard Centralized, standard Centralized, standard, automated

Architecture

SC
RP IT RP IT
Data

RP Med
FM FM FM CFO
Med SC Med SC
HR IT

• Disaggregated systems • Disaggregated systems • UoT central host system • UoT central host system
approached on a one-off • Central "translation" ability • UoT leverages existing data • Automated feeds for cost &
basis via single taxonomy linkages to receive specific audit
Role of
UoT

• No enterprise view • UoT collecting data from updates/refreshes • Shared service provider for
multiple sources analytics on financial
performance and cost

CFO impact
Lower Higher

1
Executive summary

CMO and DCFO began this cost transparency in summer of 2016

Our approach to cost transparency draws upon private sector experience from commercial consulting
partners to deliver rapid insights, allow for quick decisions, and drive smarter transformations (i.e., re-
org, business process optimization) by:
• Leveraging cost and non-cost data: Identify cost and performance implications of various scenarios
• Delivering meaningful insights: Managers can immediately use insights to manage spend
• Identifying key transformation opportunities: Isolate high-impact areas for long-term change
• Developing a unified cost framework (CODE): Quickly identify key segments which drive business
decision making within a given line of business

We implement our approach within various lines of business during a time-boxed period: initial
hypotheses and insights derived within 120 days; final within a 300-day sprint
• Our first line of business was Real Property, implemented successfully in '16
• Medical and IT were successfully completed in fall '17, with follow-on extension work currently ongoing
• Currently ~ 120 days into Supply Chain LoB and ~45 days into FM

2
Initial view on timing and major milestones for all LoBs

Calendar Year Today

LoB 2016 2017 2018 2019 2020

Real Property

Medical

IT

Supply Chain

FM

Maintenance

Service Acquisitions

HR

Community Services

Operations

Testing and RDT&E

Notional timeline
Miscellaneous for future LoBs

Initial cost baseline Finalized baseline with Annual refresh

Initial 300 days Sustainment with preliminary advanced analytic complete (year over
analytic capability capability year data available)
3
Developing the Framework
Cost transparency journey delivered in three phases

1 2 3

Define the Cost

Decision Framework Create and Manage cost
(CODE) populate CODE performance
• Define key segments • Collect and map actuals • Train users
• Based on commercial • Develop commercial • Sustain and refresh
best practice reference (CORE) model model
• Tailored to DoD • Impute data gaps and • Close data gaps
• Assess materiality, recommend way forward • Leverage for
actionability, variance decision-making

5
Phase 1: Project began with development of CODE to identify the key
business cost drivers for each LoB, with Real Property shown below

CODE focuses first on product segments:

Level of Materiality,
Real Estate Maintenance Operations Utilities
Variance, and Actionability
• Construction • Sustainment • Road clearance • Electricity
Highly material, variable • Maintenance & Repair – Snow removal
High

and actionable (overhead) – Street sweeping

– Dirt and sand
• Planning / management • Restoration & • Custodial • Natural gas
Highly material or variable
• Leasing Modernization • Grounds • Water
or actionable • Environmental operations • Sewer
• Divestment / demolition • Refuse • Steam
Moderately material or
• New land / property
variable or actionable • Environmental restoration

Neither material nor • Other • Other • Pest control • Other

Low

• Other
variable nor actionable
CODE covers additional key segments of geography, footprint, facility type and OC
• Army
Geography • Air Force
(Service) • Navy, Marine Corps
• 4th Estate (DLA, WHS, DoDEA, DHP, DECA)

Site / Footprint All installations (U.S. and overseas)

(Installation)
• Facility class (e.g., Administrative, Hospital & medical, Troop housing & mess, etc.)
Facility • Age
profile • Condition
• Other
• Personnel cost • Supplies • Communications
Object class
• Contractor cost • Travel • Other
6
Phase 2: Followed five step process to populate CODE
framework with data

1 Acquired raw data from complex systems landscape

2 Mapped data to CODE framework

3 Identified and assessed confidence levels

4 Closed data gaps where actuals were unavailable or unreliable

5 Validated mappings and confidence levels with key stakeholders

7
Phase 2: Navigated complex systems landscape to populate Is-Cost
Organization System
OSD

Budgeting
EFD
(Obl. Authority)

Army Navy MC AF DISA DHA DLA

CRIS/ Budgeting
GFEBS PBIS-DB SABRS WAAS DAI EBS
DEAMS
(Obl. Authority)

Cost Cost Cost

MC1 MC2 MC3
MC3
MC3 BSO1 BSO2 BSO3
MC3
MC3 MC1 MC2 MC3
MC3
MC3 MC1 MC2 MC3
MC3
MC3 Center Center Center

Procurement Info
GFEBS SPS
LMP NAV-ITAS ITPRAS AFWay SPS WAAS DAI EBS
PADS

NAVY-
NAVY- CRIS/DEA Execution
GFEBS STARS SABRS SABRS WAAS DAI EBS
ERP
ERP MS

8
Phase 3: Progression from Proof of Concept into Sustainment

Proof of Concept Sustainment

1 2 3
CODE Institutionalize Sustainment Extending
Real
Populate Platform Org.
Property
Manage Capabilities

CODE Refresh
IT Populate Initiate Integrating
Sustainment Performance
Manage Integrate
Management
Across
CODE Refresh
Organization
Medical Populate Sustaining a
Manage DoD Cost
Refresh Culture
Repeats for
additional LoBs

Cost
baseline

9
Key business questions drive our approach to cost transparency within a
given LoB

Assess cost Improve efficiency Transform

• What are the primary • Are personnel at • Are procurement • Where is

cost drivers? efficient levels to processes & centralization cost-
manage workload? personnel efficient? effective?
• What are the
baseline costs? • What is the value of • What is the cost of • What is the cost of
optimizing transport? non-optimal demand duplication?
• How should systems signals?
& accounting be best • How do outsourced • What is the cost of
aligned to capture costs compare to • Are IT investments non-optimal supply
costs? insourced? improving cost chain planning and
efficiency? execution?
• How do overhead • Is there opportunity
costs compare to to consolidate • How can the DoD
benchmarks? warehouses? operating model be
modified?

10
The final end-user tool is composed of three primary components

Visualization dashboard
Interactive cost analytics views designed to aid in managerial
decision making, e.g.,
• Internal and external benchmarking
• Portfolio variance
• Data quality assessment

Commercial Reference (CORE) model Is-Cost model

View of what analogous commercial entity would Consolidated DoD-wide view of annual execution
incur in functional execution costs costs aligned to cost decision
(CODE) framework
Accounts for some systematic DoD-unique cost drivers

11
Real Property: Key themes and opportunities
Wide variation in
electricity spend
Estimate potential savings
through establishing and
managing to cost performance
baselines
Above: Electricity cost per square foot
plotted for 400+ installations across all
Services (each dot is different installation)
Significant lease spend
near existing DoD facilities
Leased administrative space is
within a 30-mile commute of
dense DoD footprint
Above: Administrative leases arrayed
according to cost and amount of “nearby”
owned/leased administrative facilities
Identification of regional
clusters
Potential for CODE analytics to
inform regional consolidation
Top: DoD sites with administrative square
footage. Bottom: Top 20 “high density”
clusters of administrative facilities
12
Real Property: CODE gives Installation-level cost comparisons across all
categories of spend

Service-level spend and installations

considered in-scope

Specific
installations

Categories of spend (ex: construction, utilities, custodial, operations, etc.)

13
Cost comparison of real property

Cost comparison between AFB A, portfolio medians, and commercial reference estimates:

Air Force Base’s A real property costs in FY 16 were broadly comparable (on a per sq. ft. basis)
to portfolio medians; however, cost appeared high in both Electricity and Sustainment

14
 Electricity Spend at Air Force Base A

Electricity cost per square foot comparison vs. CORE benchmarks:

Air Force Base A Cost Analysis:

Total FY 16 Electricity Cost* ~ $7.5 Million

Total Square Feet ~ 3.44 Million Square Feet

Cost per Square Foot $2.18 / Square Foot

Cross Service Regional Median:

$1.12 / Square Foot

Next step: Review and identify best practices being employed at installations outperforming commercial
reference model
15
Key themes and opportunities for Medical
High spend compared to
Purchased Care
On average, MTFs are more
expensive than equivalent
workload performed in Purchased
Care network
• Adjusted to locality (where
possible)
MTFs above red line cost more than
Purchased Care workload equivalent
MHS outliers define
performance gaps
Departments, MTFs, and Markets
have large variance in cost
performance when compared to
peers
• Controlled for potential
causes (e.g. readiness, GME,
OCONUS, etc.)
Comparable MTFs have large variances in
cost performance for same department
Low FTE utilization relates
to high unit cost
Lower utilization rates drive
inefficiencies in cost performance
at Department, MTF, and Market
levels
Physician utilization generally correlates
with cost performance for each
department/MTF combination
16
Information Technology: Key themes and opportunities

Higher spend compared to Lack of consolidation in Inefficiencies in usage of

Commercial References
Delta with Commercial Reference
model, driven primarily by:
• External services
• IT personnel
third party vendors external service providers
High concentration with top IT spend/FTE increases in
vendors, with long tail of spend MAJCOMS that have greater % of
spend on external services

17
Underpinning all reform levers is a foundational need for cost
transparency

Potential reform levers for

public sector leaders

Invest in new Reduce cost Optimize Divest non-core

Influence demand
capabilities inefficiencies performance activities

What are the potential reforms under consideration?

What are the key management questions with respect to cost?

What business analytics are required to support decision making?

What data elements should be captured within cost framework?

Cost transparency lays the foundation across

the spectrum of reform
18
Financial Management Framework
Financial Management Framework Key Discussion Points

Objective Goal for discussion

1 Share final CODE framework Provide visibility to final version approved
by Steering Committee

2 Share view of E2E process mapping Share approach of using both commercial
and BEA processes

Early view on mapping of CODE framework

3 Share sample "use cases" with early view Provide sample of questions that could be
of visualizations answered using data

Get your input on additional questions or

visualizations you'd like to see

20
 Financial Management CODE Framework
CODE focuses on eleven FM capabilities... ... and covers additional cost segments

21
 Created view of FM processes based on both commercial references,
then mapped DoD BEA processes and CODE activities

10.1 10.3 10.4

Maintain Maintain Receipt, Process Invoices
Source Goods Manage Execute Execute Disburse Review
P2P: Vendor Material
and Services Contracts Requisition Purchase
Acceptance, Process Expense 10.2 Payment Payment
Master Master Returns Reimbursements
8.1 8.2 8.3 8.4
Maintain Credit and Manage Manage and
Maintain Manage Manage Fulfill Bill/Invoice Manage
O2C: Customer
Item Master Leads
Risk Sales and
Sales Orders Orders Customer
Process AR Process
adjmts.
Master Approval1 Quotes Collections

B2R/
6.1 6.2 6.3 6.4

Manage Accounting Policy Perform General Accounting Perform Fixed-Asset Accounting Perform Periodic Financial Reporting
R2R:
9.1 9.3 9.5

Perform Manage Manage Manage Manage

Manage Manage Manage Process Manage
Manage Workforc Source and Mobility & Employee Report Manage Conflict & Separation
H2R: HR Policies
Employee
e Hire Talent
Learning &
Deploy-
Comp and
Perfor- Time Pay
Payroll Labor
Comp- &
Data Dev't Benefits Taxes Relations
Planning ment mance liance Retirement

Certain CODE capabilities considered supporting functions and not currently represented as part of an End-to-
End business process, including:

• Audit and Internal Controls (4) • Management of Financial Systems (7)

• Treasury Operations (5) • Community and Organization Support (11)

= Financial Management LoB = Supply Chain and Acquisition LoBs = HR LoB = Multiple LoBs

22
 Procure-to-Pay (P2P) process: comparing commercial and DoD POV

10.1 10.3 10.4

Maintain Maintain Source Receipt, Process Invoices

Manage Execute Execute Disburse Review
Commercial Vendor Material Goods and Acceptance,
Contracts Requisition Purchase Payment Payment
10.2
Process Expense
POV: Master Master Services Returns Reimbursements1

Master Data Management Strategic Procurement Operational Procurement Invoice-to-Pay 10

10.1 10.3

DoD BEA Perform 10.2 10.4

Create Develop Award Administer Manage Perform
receipt, Manage
POV: Purchase Procurement Procurement Procurement
acceptance
Procurement
Disbursement
Instrument
Requisition Strategy Instrument Instrument Entitlement Closeout
and returns

Preliminary BEA observations for validation:

• Master data management is not cited as key component of process

• Commercial references often cite strategic sourcing of goods and services first, as opposed to opening a
requisition and then developing a strategy
• Award procurement instrument is not as significant of an event in commercial equivalent process

= Financial Management LoB = Supply Chain and Acquisition LoBs = HR LoB = Multiple LoBs

Notes: 1.) Expense reimbursements are part of P2P in most commercial organizations.
23
FM visualizations answer three main type of questions

Total cost Comparative cost Key drivers

What am I spending on How efficient is my What are key drivers of
a given capability/ performance compared performance and cost?
process? to cost?

Scope, magnitude, Top 1-2 indicators of Capability-specific

allocation process health views and cost drivers

Shown as total costs Shown as normalized Shown in domain-

and/or FTE's aligned to costs to facilitate specific metrics
CODE capabilities comparisons across
across key processes benchmarks
24
Current view of questions for each use case process (I/II)
Use cases to grow and evolve as team explores data and gets further stakeholder input

Total Cost Comparative Cost Key Drivers

How much does the How efficient is the PB function How many people are involved in PB?
PPBE programming and budgeting process Service / Agency? Level of involvement? FM coded or
(PB) function cost the DoD? shadow FM1 ?
(B2R) Does diffusion of task responsibility
Focus of today drive increased costs?
How much does the FM How efficient is the Accounts Payable What is driver of efficiency gaps for
portion of procure to pay process across Services and vs. AP? Differences in source channel?
P2P (P2P) function cost the benchmarks? Seasonality? Something else?
DoD?

How much does audit Why do audit readiness costs continue Right mix of labor?
readiness cost the DoD? to increase? Should audit readiness continue to be
Audit / IC outsourced? Can skillset be developed
internally to DoD?

How much does acquire-to- How efficient is the A2R process by How are costs spread across A2R sub-
retire (A2R) cost the DoD? Service / Agency and vs. commercial processes?
A2R reference? Do A2R costs increase with expected
life of fixed assets?

1. "Shadow FM" defined as personnel performing activities within the FM CODE who do not have an FM job code or explicit FM duties in their job description.
25
Sample Procure-to-Pay use case: AP efficiency

Business processes /
CODE Capability Support activities
1. Programming and Budgeting
Analytic Support

PPBE
(B2R)
2. Cost Accounting and Performance
Management
Procure-to-Pay
3. Capital Planning and Accounting
Compliance

Audit / IC
4. Audit and Internal Controls

Acquire-to-Retire
5. Treasury Operations
Reporting

6. General Accounting and Reporting

Budget-to-Report
7. Management of Financial Systems
Transactional

8. Receivables Management
Hire-to-Retire
9. Payroll

10. Payables Management

FM systems
11. FM Community and Org Support
26
Sample Procure-to-Pay use case: AP efficiency

Comparative
Total cost cost Key drivers
Question: Question: Question:
• How much does the FM • How efficient is the • What is driver of efficiency
portion of procure to pay Accounts Payable process gaps for AP? Differences in
(P2P) function cost the across Services and vs. source channel?
DoD? benchmarks? Seasonality? Something
else?
Evidence: Evidence:
• Total costs for CODE • Invoice volume processed Evidence:
activity 10 per FTE • Invoice volume/$
processed by service and
Next steps: channel
• Determine comparative Next steps: • Detailed invoice metadata
costs across Services to • Where gaps exist,
inform areas of determine drivers of Next steps:
inefficiency inefficiencies • Shift invoice volume to
high success rate channel
• Determine cyclical cause of
invoice errors in months
xxx-yyy 27
Comparative cost: Accounts Payable
Invoices processed per FTE

Managerial Insights
• All Services less
efficient than
-11% 408
commercial
381 377 references
338 348 • Services have
>10% variability
once normalized,
with Army lowest
performing

Further lines of
inquiry
• What is driver of
efficiency gaps for
Air Force Army Navy Marines Commerical
AP? Differences in
Reference
source channel?
Seasonality?
Something else?
28
Key drivers: Accounts Payable for the Army

Invoices by source channel % of invoices not automatically matched

6%
1%
2%

4%
2% 3.5%
6% Army (mean)
2%
1.7%
96%
Commercial reference

93%
0%
Ja Fe M A M Ju J Au Se O N D
DoD Army n b ar pr ay n ul g p ct ov ec
excl. Army Example conclusion: Army AP inefficiency likely driven
by high usage of email to receive invoices; while some
Fax Email Electronic seasonality exists, it is likely linked to FY closeout and
not a primary driver of inefficiency

29
Data required to support P2P use case analysis

Sample Potential Potential Data

Analyses Data Requirements Data Sources Status
• Analysis of invoices • Personnel costs involved in • Invoice type utilization • DFAS data
processed per FTE process report contains majority
involved in P2P • Invoice volume and success • Contract data (i.e. FPDS) of required
process metrics from standard business • Disbursement data volumes/counts
• Invoice to Pay cycle intelligence reports • General Ledgers (i.e. GAFS, • Analysis of WAWF
time GFEBS) data expected to
• Analysis of invoice • Activity Survey provide invoice
type • Additional sources TBD data
• Add’l sources TBD

30
Adoption
 Fostering Stakeholder Engagement

The CODE Business Integration Office (BIO) Team will help facilitate Sustainment efforts by communicating
OSD’s cost management vision and enabling cross-LoB integration

The Cost Management Board is a meeting that connects the CODE BIO Team to the functional communities and
enables two-way communication

Cost Management Board

CODE BIO Team • An LoB-specific forum for Functional Community
CODE BIO and Action (LoB AOs)
• Communicates OSD
Officers (AOs) to discuss
cost management • Provides functional-
pertinent cost management
vision specific context to cost
topics
• Facilitates AOG management questions
• Meetings are held on an
progress towards • Communicates and
as-needed basis
Sustainment escalates broader cost
• Enables CODE BIO Team
milestones issues and potential
to provide updates on
• Serves as a liaison impacts (e.g., source
milestones and next steps
between OSD system changes)
for DoD’s ECM
ODCFO and the • Informs ODCFO on
• Functional communities
functional current operating
can provide insight/context
communities environment
on relevant operational
issues, priorities, etc.
32
Key Business Questions to Focus Approach and Analytics

ERP / FM
High HR System Contract Renegotiation
Standardization JESAs
Standardization / Vendor Management JELAs
Linking Budget
To Spend Unified Contract HW/SW Asset
Communications Management Management
Cyber Move to SAAS /
ROI Cloud Solutions Measuring IT
AI / Machine Asset Utilization
Interface NSA GL Reseller
Learning
Simplification DISA WCF Elimination
Exploration
Impact

Traceability Automated
Demand Contract Writing
Data Quality
Management Help desk Standardization
Optimization
Biometrics Eliminate Rogue
IT Spending
Vendor Cost
Data Calls
Low

More difficult Ease of Implementation Less difficult

Focus areas Currently in flight (not

Tier 1 opportunities Tier 2 opportunities Tier 3 opportunities (current) managed by reform effort)