Reduction of Total Ownership Cost - R-TOC - U.S. defense policy

Program Manager, Nov, 2000 by Spiros Pallas, Mike Novak

Recent History and Future Prospects

With the Cold War having run its course, significant new funding for DoD is not seen in the near future. But since the United States still maintains a worldwide role, weapons systems containing the latest new technologies are needed by our forces to replace aging systems.

DoD continues to look at a variety of methods to maintain its forces in a com-bat-ready status within budget limitations, but is having difficulty doing so. Thus, the common thread running through this article is that the Department is striving to maximize the use of modernization funds to improve operational readiness by making the entire Defense Life Cycle Cost system more efficient both in force readiness and in the use of scarce dollars.

Modernization Must Continue

There is an explicit recognition that DoD must continue to provide our forces with quality equipment to execute their missions even with reduced funding. Former Secretary of Defense Richard B. "Dick" Cheney, when talking about the Gulf War, gave praise to his predecessors who were responsible for development and acquisition of the equipment that ultimately resulted in a stunning victory for the United States.

Modernization must continue during this time of relative calm. We must ensure that the next time our forces are needed to defend our national interests, they can do so with the appropriate equipment that will allow them to gain their objectives at the lowest possible cost in human life.

Improving the Acquisition System Began Years Ago

Efforts to improve the acquisition system extend backward in time for a considerable number of years and administrations. The situation mentioned previously (lower budgets with the same or improved readiness) was recognized long ago, and there have been many great thinkers working the problem. One of the landmark initiatives was the 1986 Packard Commission Study. Prior to that, the Grace Commission (1983) looked at the DoD acquisition process. David Christensen et al, in a DSMC thesis entitled, "The Impact of the Packard Commission's Recommendations on Reducing Cost Overruns," listed some of the more important events, studies, and regulations (Figure 1).

The major thrust of the majority of these efforts was in the area of reducing acquisition costs. To be sure, total life cycle cost was explicitly mentioned in some of the initiatives (such as Department of Defense Directive [DoDD] 5000.28, Design to Cost), and "reliability and maintainability" were routinely considered in program reviews. However, the acquisition community wrote and promulgated the above regulations and instructions.

Unit costs were easily seen and tracked in an acquisition budget, but the costs of operating and supporting systems were generally outside the sight and control of the acquisition community. Therefore, intense focus remained on acquisition costs, and attempts to control life cycle costs were minimal.

The R-TOC Environment

Initially, Reduction of Total Ownership Cost (R-TOC) did not spring forth as an explicitly stated initiative. Rather, it evolved under deliberations in the Defense Manufacturing Council (DMC), which later was renamed the Defense Systems Affordability Council (DSAC). Leadership of the multiple efforts that eventually became R-TOC was split between various groups.

The following discussion will attempt to track and document that path, including the events that shaped the environment within the Pentagon. [1]

Perry Mandate

One major event that contributed to the environment not captured in Figure 1 was the February 1994 memorandum, "The Problem -- Why Change is Necessary," issued by then Secretary of Defense William J. Perry. That mandate appears to have started the most recent efforts to reduce DoD costs. Starting at this point in time, we will begin detailing a series of events leading to the initiative known as Reduction of Total Ownership Cost (R-TOC).

The Perry mandate made a number of excellent points. One of those points is restated here to frame this article:

"Adopt business processes characteristic of world-class customers and suppliers (and encourage DoD's suppliers to do the same)."

This point is not simply a re-statement that the DoD must procure items less expensively. Rather, the point is a call for DoD to mimic businesses that are driven by the "bottom-line" metric. That metric ties the quality of the equipment to the total cost of ownership of the system.

Color or "Pots" of Money

One difference (among many) between a "real" business and DoD (related to the total cost of ownership) is that business has only one "color of money," while DoD has many. Business can easily answer the question: how much does a particular investment cost the business (bottom line)? Money is money, and that shows up in the earnings per share for a company.

The Department of Defense, on the other hand, has different "pots" of money, controlled by different sectors in DoD. Because of different accounting rules and since every controlling interest jealously guards their "pot" from other DoD interests, scoring total savings across all of DoD is difficult at best.