MARTIN DUNN
Efficiency is the use of a given set of resources which maximise associated outputs at minimum total cost or the use of minimum input resources for a predetermined level of output. It is essentially a resource usage concept.
Defence Audit Manual
An emphasis on efficiency is not new to the Defence Organisation. All government agencies, Commonwealth, state and overseas, have been seeking more efficient ways of operating virtually from creation. In the Commonwealth public sector, this desire became particularly intense since the implementation of the Financial Management Improvement Program (FMIP) in the early 1980s. Most recently in Defence, the establishment of the Defence Efficiency Review (DER) brought the issue back into focus.
But what is efficiency and how is it measured?
Some Definitions
This is an area where definitions abound, not often for the benefit of clarity. In Defence, the following definitions are popular. An organisation starts with its inputs, its budget, staff, etc, and through its operations or processes produces some tangible outputs. For Defence, this may be trained units. The outputs in turn have impacts or outcomes which ideally align with the objectives of the organisation - for example, a secure Australia.
In this context, efficiency is the relationship of inputs and outputs, while effectiveness is the relationship between outputs and objectives. Thus efficiency is "doing things right" while effectiveness is "doing the right things". The term cost-effectiveness is used to embrace both efficiency and effectiveness.
While such definitions provide clean theoretical distinctions, the real world presents some problems.
Measuring Outputs
The most immediate concern is determining what is an output and what is an outcome. It is normal for "outputs" themselves to be products of a whole range of intermediate outputs. As the system becomes more complex - and the Defence Organisation is probably the most complex of systems, two-way interactions and loops can be detected. For example, the professional qualities of the Defence Force depends on the quality of the recruits, but the number and quality of recruits depends on public perceptions of ADF professionalism.
The implication is that the "output" is, in some sense, the final output of the organisation - the consequence of its internal processes; while the "outcome" is the results of that output when external factors have had their chance to play. Yet this formulation is itself unsatisfactory as it assumes that the internal processes are immune from external influences.
From the Defence Organisation perspective, providing a distinct outcome is problematic. Typically, it boils down to something like "a secure Australia". Defence is doing its job if we are not attacked - yet this is probably more dependant on external factors than on the efforts of the Organisation itself (although even this claim is impossible to test in any robust way).
Defence has adopted "capability" as its final measure of output or outcome. Thus, at the organisational level, the neat distinctions have already collapsed. But "capability" itself comes with problems. Most typically, capability is defined in terms of the intermediate outputs that contribute to it. Thus the instruction on the Force Development process states that:
Military capability is a function of force structure and preparedness. While preparedness is a function of equipment stockholding, equipment condition, manpower and training...[2]
Similarly the 1994 white paper, in a more encompassing definition, lists the "components of capability" as "personnel, training, equipment, organisation, structure, deployment, preparedness and doctrine".[3]
It is not clear that these lists are comprehensive. For example, should something like public relations capability be included? And if there are activities in the Defence Organisation which do not contribute to the final output, why do they exist?
Even when the components of capability are established, there is no easy function that can be applied to obtain a measure of capability - although some of our language implies that there is (for example, "force multipliers").
The true test of capability is, of course, a war. But this is not a particularly useful observation nor one that can be used for management purposes. The net result is that a considerable analytical effort is expended assessing capability.
Capability is not independent of external factors nor a constant. It depends on the circumstances in which the forces would be employed. For example, while we see a carrier battlegroup as a very capable unit, it is not if the enemy is miles inland at Tajikistan, or if the enemy are Somali bandits. The Vietnam War offered a clear example of how an apparently capable force proved incapable because it did not suit the context. In Australia's case, where it does not identify any of its neighbours as a threat, assessing capability is going to be far from straightforward.
Even if we know what our threat is, it is not as clear that we understand or agree on all the interactions that produce a capability. If we had a universal consensus, there would be no debate on the merits of air power, seapower, etc, as paths to a war-winning force structure.
Measuring Inputs
The input side of the equation is a fraction easier to address - most of the cost of Defence is represented by its annual budget appropriation. Yet even so, there are a range of issues which challenge accountants - not just in Defence.
Firstly, to what extent should the costs of other organisations be attributed to Defence. Should we add on a portion of the costs of the Auditor-General, the Public Sector and Merit Protection Commission, and so on? If so, are there also savings that should be attributed to Defence?
Defence has a large stock of equipment and facilities. How should these capital assets be valued? Some don't have an obvious market value. More pertinently, as we move into an information age, how do we value our intellectual and human capital - the vast investment in training, developing doctrine, etc?
And should we include indirect costs (and benefits) accrued by the community as a whole? For example, the loss of amenity that might be caused to community by the proximity of ADF training?
Other Bugbears: Time and Risk
Of course Defence is not a one-off, but an ongoing activity. Expenditure on Defence will continue into the future. The accountants' technique of Net Present Value (NPV) analysis can reduce a future stream of money to a single figure. However, there isn't an equivalent way of providing for an equivalent stream of security or capability.
In essence Defence makes these sorts of decisions on a regular basis when it tries to find cost trade-offs between the investment program and preparedness; or between preparations for "Short Warning Conflict" and "major attack".
"Risk" presents a similar problem, and is related to the issue of time. NPV analysis makes an allowance for financial risk, but how should "security risk" be treated? We are inclined to think of Defence as an insurance against risk so it is tempting to argue that no risk is acceptable. This, however, is not realistic. There are some risks that we accept because it would be disproportionately expensive to attempt to counter them. We never tried to defend against a superpower attacking Australia with nuclear weapons. Nor do we plan to fight a coalition of all our neighbours. Even against lesser threats, it is normal for states to only plan on some probability of winning or, in even more unfavourable circumstance, a chance of inflicting more harm than the value an opponent might derive from military adventurism. So how should risk be evaluated?
Relativities and The Optimisation Process
Having obtained a measure of efficiency (assuming that this can be done), the question then becomes what to do with it. Firstly, there is the question of working out what it means - is it good or bad? As there is only one Australian Defence Force, relativities are not easily achieved. Some benchmarking of particular activities - comparing performance to similar organisations - is possible. Such comparisons are always going to be imperfect, but may indicate the scope for further improvement.
Theoretically change is based on a rational assessment of options together with the costs and benefits of each. In practice such a rational approach is too complex to produce clear conclusions, exhaustive analysis is too time consuming, and the changes too far reaching to be implemented successfully. The reality tends to be incremental, as the problem is addressed in parts.
Conclusion
The Defence Efficiency Review findings will be announced in the near future, and undoubtedly will examine many parts of the Defence Organisation to see if the same results can be achieved with less. They may also identify some marginal activities which could be shed.
It is less clear that it will emulate the 1991 Force Structure Review in the extent that it affects the force structure proper. Rather, it will follow the tradition of incremental improvements. Logistic and command overheads are obvious targets, but while some changes may be proposed to combat support it is not sustainable to address the combat forces without a clear idea what is sought on the output side of the equation. To date the Government has hinted at some changes in direction, but what precisely they mean in terms of defence objectives and strategy will need the completion of a strategic review to clarify.
2. DI(G) ADMIN 05-1, The Force Development Process, 16 January 1992, paragraph 5.
3. Commonwealth of Australia, Defending Australia: Defence White Paper 1994, AGPS, Canberra, 1994, paragraph 4.51
Originally published in Research & Analysis: Newsletter of the Directorate of Army Research and Analysis, Issue 13, Canberra, March 1997.
(c) Copyright Commonwealth of Australia 1997 - reprinted with permission.