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

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

Further, with the Cold War at an end, not all of those "pots" are adequately filled to perform the mission of preparing for war in order to keep the peace, which, after all, is the real job of DoD. Thus, trying to shift funds from one "pot" to another, in order to improve readiness while reducing total DoD costs, rapidly becomes a bureaucratic nightmare. Only when the mission of DoD becomes compromised through decreased readiness will money readily flow from "pot" to "pot." However, transfer of funds to meet a current "emergency" may not be the most cost-effective way to do business.

For a number of years, there was (is) a consistent leakage of money (estimated to be about $2 billion per year) from the modernization "pot" to the maintenance "pot." While this flow of money did help shore-up weapons system readiness, it had the impact of mortgaging future mission capabilities.

Money that was meant to improve future capabilities was being used to maintain the aging equipment that was needed to retain readiness. The resulting lack of modernization funds meant that the aging equipment would not be replaced as rapidly as desired. This, in turn, meant that more money would be needed to maintain the aging equipment.

The "Death Spiral"

Under Secretary of Defense for Acquisition, Technology, and Logistics Dr. Jacques S. Gansler termed this the "death spiral" after he took office in 1999. This short descriptor caught the attention of Defense and Congressional leadership and was a factor in accelerating efforts to reduce ownership costs.

A reasonable approach to reducing the overall cost for weapon systems is to look at what it costs to develop, buy, maintain, and dispose of systems, and then focus efforts on the cost drivers. For platforms (aircraft, ships, etc.), informal estimates have been used to indicate that the costs to use equipment can be on the order of 60 percent of the life cycle cost, with the rest of the total cost split up into the other areas.

While this percentage will vary with the specifics of the platform, clearly the cost of using the systems has to be considered an important component in DoD's total expenditures. In addition, in order to modernize the force, the hemorrhage of modernization funds has to be reduced or stopped.

CAIV and Readiness

Dr. Paul G. Kaminski, then Under Secretary of Defense for Acquisition and Technology, issued a memorandum in December 1995, "Reducing Life Cycle Costs for New and Fielded Systems," addressing this concern. He stated that "reducing the cost to acquire and operate the Department's equipment while maintaming a high level of readiness for the user is my highest priority." (That memorandum is commonly referred to as the memorandum that directed the use of Cost As an Independent Variable [CAIVI in Defense acquisition.) There were two parts to the memorandum: one addressed developing systems that are in the acquisition cycle, and the other part addressed fielded systems.

In the implementation portion of the memorandum, he directed that for fielded systems, the Deputy Under Secretary of Defense for Logistics would: