Many people seem to think the budget drives the mission. This is patently untrue. It is the spending the drives the mission and Cost Managed Organizations (CMOs) use a command and control process to get more “bang for the buck.”
In effect, the control process works like an additional source of budget. Savings generated are essentially self-supplements to the original budget. Efficiencies are budget multipliers. Good CMOs aggressively seek creativity from all teammates regardless of job grade or rank to drive continuous improvement.
How Does A Cost Managed Organization Work?
Cost managed organizations use a disciplined, periodic process of reviewing cost and performance as a forum for interaction. The process has four basic components and three key questions. We can think of the process starting with some sort of plan. The plan creates a expectation for performance. The plan can be a simple a duplicating the prior period’s performance or extremely detailed and complex. The goal of this phase is to define:
What did we expect to happen?
The second part of the control process is merely the execution phase where the organization conducts its business. The duration of this phase can vary. It could be daily, weekly, monthly, or quarterly. Monthly or quarterly periods probably make sense for most organizations. Periodicity is a cost benefit tradeoff. Shorter periods drive up the cost of the control process while longer periods reduce the benefits of rapid process control feedback.
The third part of the control process is measurement. This phase involves some degree of managerial costing to determine the “actual” performance during the period. The measurement phase answers the question:
What Actually Happened?
The final and most important phase is the AAR or After Action Review. Here is where we look for a meeting of peers conduction their review of the period’s performance for the supervisor. Here the question before the team is:
What Explains the Difference?
The difference (or variance) between expected and actual results creates a learning opportunity that drives accountable team members to dig into their operations to determine the root causes of the effects observed in the actual results. (Note that this learning experience is completely lost when only looking at annual budgets that are diligently spent at the 99.9% level.)
Understanding the root cause of a variance can lead to three feedback loops to the ongoing process. First it might highlight a problem in planning where key cost elements were overlooked or misestimated. The planning process can then be improved for the next cycle.
Second, the variance might show a weakness in the measurement phase. Perhaps we need to measure something differently to highlight a particular issue. Or perhaps there was an accounting mistake that needs to be corrected.
Third and most importantly, we may see real problems or opportunities in the execution of operations. We often find problems that can be fixed or improved.
Fix Problems, Not Blame
It is up to the leader of the after action review to create a climate of openness and truthfulness. This requires some leadership skill. If the review is adversarial, subordinates are likely to cover up or obfuscate issues. It is also possible to “cheat” on the numbers shown in the actuals to avoid having to discuss a variance. (This is one reason that the staff support must be the keepers of the numbers.)
Using the AAR forum to highlight and commend continuous improvement initiatives is also a very positive aid to creating the constructive climate of the AAR. This is even enhanced by using the meeting to redeploy saving from improvements to key “unfunded requirements” of the subordinate.
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