Cost beniefit analysis training for decision makers and manager step2

AMERICA’S ARMY: THE STRENGTH OF THE NATION CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Cost-Benefit Analysis (CBA) Four-Day Training Briefing Step 2: Define CBA Boundaries and Parameters Visit our CBA Website for more information regarding locations, Version 3.0 (Draft) signing up, upcoming training sessions, and more Last Updated: 10 November 2011 https://cpp.army.mil Defining CBA Boundaries and Parameters Define Problem/Opportunity and Objective CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Define Scope; Formulate Facts and Assumptions Define Alternatives Develop Cost Estimate for each Alternative Identify Quantifiable and Non-Quantifiable Benefits The Boundaries and Parameters of a CBA are the specifications that make an analysis feasible and practicable They are expressed by Scope, Facts, and Assumptions • Scope: Defines the range of coverage encompassed by an initiative or proposal along specific dimensions like time, location, and organization • Fact: A verifiable statement that is real and something that has happened or is happening • Assumption: A conclusion drawn from facts and observations describing a status or condition that is not certain to exist Define Alternative Selection Criteria Compare Alternatives Report Results and Recommendations The CBA should state the involved stakeholders, period of time that the analysis covers, and Stakeholders’ Needs not addressed in the analysis Boundaries and Parameters CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Boundaries and parameters provide the limiting conditions that make a controlled analysis of alternatives possible Consider: – Difficulty of analysis in an unbounded problem: how to achieve world peace – Possibility of analysis in a bounded problem: how best to neutralize the threat of potential Iranian nuclear capability by the strategic deployment of a new missile defense system, given an annual budget allocation of $1.5B, and given that several potential deployment sites exist in Eastern Europe and the Middle East CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Boundaries and Parameters • In a CBA, the boundaries and parameters are expressed in the Scope, Facts, and Assumptions CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Definition: Scope • “The scope of the analysis defines the range of coverage encompassed by the project along specific dimensions such as time, location, organization, technology or function The CBA should state the involved stakeholders, period of time that the analysis covers, as well as organizations or requirements not covered or addressed in the analysis.” (CBA Guide, “Step 2”, https://cpp.army.mil) Scope • The choice of scope is very significant, and can distort the analysis in favor of one or more COAs Consider: – The cost of buying versus leasing a car CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • over a period of one year • over a period of fifteen years – O&M costs of Pentagon office space from the perspective of: • • • • Individual DoD employee Department of the Army Department of Defense Taxpayer – Impact of 2008 Lehman Brothers bankruptcy on: • • • • • Lehman Brothers 2008 summer intern Lehman clients Barclays U.S and international financial markets 2011 Occupy Wall Street protesters Scope Different scopes entail different cost estimates: For example, Flyaway, Weapon System, Procurement, Program Acquisition, and Life Cycle Costs all encompass different types of costs CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Scope CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • The scope chosen for the CBA – Must be the same across all COAs – Must allow for a fair comparison between the costs and benefits of all alternatives “Normalization.” • For instance, if the cost of COA1 starts off very high in the first year but drops off sharply in later years, and the cost of COA2 starts off low but rises sharply in later years, the time scope chosen should be sufficiently large to accurately capture the effects of both trends Scope Exercise • Properly scope the following CBA: CBA 4-DAY TRAINING SLIDES UNCLASSIFIED – A comparison of two new weapons systems, Sys and Sys 2, to be procured by all FORSCOM units Sys has a lifecycle of years, Sys has a lifecycle of years O&S costs are shown in the table below Give the appropriate length of analysis for this CBA FY1 FY2 FY3 FY4 FY5 FY6 Sys $3M $0.5M $0.5M $0.2M $0.4M $0.7M Sys $1M $1M $1M $0.8M - - Note: Fictional Scope Exercise • Properly scope the following CBA: CBA 4-DAY TRAINING SLIDES UNCLASSIFIED – A comparison of two new weapons systems, Sys and Sys 2, to be procured by all FORSCOM units Sys has a lifecycle of years, Sys has a lifecycle of years O&S costs are shown in the table below Give the appropriate length of analysis for this CBA FY1 FY2 FY3 FY4 FY5 FY6 Sys $3M $0.5M $0.5M $0.2M $0.4M $0.7M Sys $1M $1M $1M $0.8M - - Solution: The appropriate time span is 12 years … the lowest common multiple of the four- and six-year lifecycles for the two systems Note: Fictional 10 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Scope Exercise • An office within HQDA is expanding by 10 people and requires additional desk space within the Pentagon Since the office space is provided to the Army by DOD without charge, one analyst has suggested that all COAs within the Pentagon are cost-free, and therefore only benefits need to be considered Determine if this reasoning is correct, and determine the appropriate scope for the analysis 11 Scope Exercise CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • An office within HQDA is expanding by 10 people and requires additional desk space within the Pentagon Since the office space is provided to the Army by DOD without charge, one analyst has suggested that all COAs within the Pentagon are cost-free, and therefore only benefits need to be considered Determine if this reasoning is correct, and determine the appropriate scope for the analysis Solution: Scoping the cost to the Army, the cost of office space is not captured The appropriate scope which captures the full cost is from the perspective of DOD Note: These answers assume that the additional staff must be in the Pentagon If putting the 10 people in another building is a viable alternative, then the solution shown here would probably change 12 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Scope Exercise • An Army organization currently employs 1000 people, all DACs This organization has prepared a CBA comparing the costs of converting of the current DACs to contractors (working the same number of hours) The annual cost to employ each DAC is $100K, and due to training expenses, the cost to employ each contractor is $110K In the CBA, the cost of COA1 (all DACs) is listed as $100M, and the cost of COA2 (995 DACs, Contractors) is listed as $100.05M What is wrong with the scope of this CBA? 13 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Scope Exercise • An Army organization currently employs 1000 people, all DACs This organization has prepared a CBA comparing the costs of converting of the current DACs to contractors (working the same number of hours) The annual cost to employ each DAC is $100K, and due to training expenses, the cost to employ each contractor is $110K In the CBA, the cost of COA1 (all DACs) is listed as $100M, and the cost of COA2 (995 DACs, Contractors) is listed as $100.05M What is wrong with the scope of this CBA? Solution: The scope should be confined to the five positions that are being considered for conversion The comparison should be between five DACs and five Contractors 14 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Definition: Facts Facts: • A verifiable statement that describes an objective condition or event, something that has happened or is happening The most relevant facts are those that constrain the CBA • Constraints are the “limits placed on resources to be devoted to the project All managers are faced with certain constraints within which they operate Constraining organizational policies or procedures, funding considerations, physical limitations, and time-related considerations need to be addressed in the CBA These policies/considerations could stem from technical, environmental, ethical, or political constraints.” (CBA guide, “Step 2”, https://cpp.army.mil) 15 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Definition: Assumptions Assumptions: • A condition or situation over which we have no control but is essential to the success of our proposed solution • Assumptions impose risk on the solution The risks and risk mitigation measures must be specified in the CBA • Sensitivity analyses are performed by purposefully strengthening or weakening individual assumptions, and noting the effect on the COA recommended The best COAs are those that remain the optimal course of action over a wide range of assumptions 16 Assumptions CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Assumptions made for one COA should be made to the same degree in all other COAs as relevant For instance: – It is not reasonable to assume in one COA that 20 people will required to perform a task if in another COA it is assumed that only 15 people are required to perform the same task – It is not reasonable to assume in one COA that a particular resource will be available in 10 years, if in another COA it is assumed that it will be available only for the next year 17 Facts and Assumptions Examples CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • “Army War College S&P Department Expansion CBA” – Fact: Course demands through the Strategy and Policy Department at the War College have increased by 65% over the past three years – Fact: 60% of the S&P Department faculty will be 70 or older in the next five years – Assumption: Workload for department faculty will increase – Assumption: More than one third of the S&P faculty will retire within the next five years – Assumption: After an initial training period, each new hire will be able to perform as much work as the recently retired faculty member – Fact/Constraint: the War College Dean has allocated no more than $1.2M/year to pay the salaries of new faculty members 18 Facts and Assumptions Examples CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • “U.S Army Central Command Afghanistan Police Force Training” – Fact: President Obama has announced that all U.S troops will withdraw from Afghanistan by the end of 2014 – Assumption: Troop withdrawal will proceed as scheduled – Fact: American troops provide for 80% of current domestic counterterrorism force training in Afghanistan – Assumption: demand for counterterrorism training will not decrease after U.S withdrawal – Assumption: without coordinated assistance, security training resources will be understaffed after U.S withdrawal Note: Notional 19 Facts and Assumptions Exercise CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • You are preparing a Cost-Benefit Analysis to aid in the decision to sell or lease an older fleet of U.S Army helicopters to the Iraqi Army From the following facts listed, draw possible assumptions relevant to the analysis: – Fact: under the current agreement, a lease may be extended or concluded at the end of every two years, at the discretion of the Iraqi Army At the conclusion of the lease, the helicopters will be returned to the U.S Army The RAF will be accountable for any damages beyond normal wear – Fact: The fleet has been used extensively in Operation Desert Storm (Iraq, 1991) They will also be used by the Iraqi Army in a similar climate – Fact: Recent sales of used helicopters have been at “as-is” condition 20 Facts and Assumptions Exercise CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Possible assumptions: – Under a lease, the Iraqi Army will have less of an incentive to properly maintain the fleet against “normal wear,” and the actual life cycle of the fleet may be reduced as a result – Since conditions of use are similar, future wear can be approximated by historical wear – By selling the fleet, the U.S Army will not be responsible for further costs of maintaining the fleet (i.e the buyer assumes the risk) • Other facts to be determined that would aid the analysis: – Estimate of remaining lifetime of the fleet – “Lease” and “Buy” prices at which Iraqi Army is willing to settle – Remaining utility of fleet to U.S Army 21 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Review Exercise: Henry Ford • In a rented garage at 58 Bagley Street in Detroit, Henry Ford completed his first gas-powered car on the morning of June 4, 1896 He had spent $250 FY1896 dollars on equipment to build the car, and $100 on labor The garage cost $15 per month to rent After the car was assembled, it was clear that it would not be able to fit through the door of the rented garage The car was to be used as a model for the two-year long test-driving phase of his R&D process, with the final goal of arriving at a model for mass production and sale Define the scope and identify facts and assumptions 22 Mini-case Exercise #1 or “who, oh who should overtime bill?” CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • Following the President’s announcement of the scheduled deployment of three BCTs to Australia, it has been determined that a secure communications link must be established between the White House, Pentagon, State Department, and the new Australian base SECDEF and CJCS have tasked Army WEBCOM with the extra responsibility of managing the new communications link Currently, 35 Army civilian GS-11 employees in WEBCOM are assigned to U.S Army Pacific It is anticipated that 42,800 total work hours per year will be required to maintain the new communications link Each of the 35 Army civilians currently works full time For Army civilians, if less than 200 hours of overtime is worked per year, the pay rate for overtime is $60 per hour If between 200 and 400 hours of overtime is worked per year, the pay rate is $80 per hour of overtime If more than 400 hours of overtime is worked in one year, the pay rate is $120 per hour of overtime Contractors may be hired No vendor quotes are currently available, but from the GSA catalog it has been determined that hourly rates can be estimated to be $88/hr for this type of contractor labor Currently, WEBCOM has been placed under a hiring freeze for Army civilians only Perform all CBA steps to support a decision 23 Mini-case Exercise #2 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED or “how much for one building?” • In preparation for BRAC, the Army plans to build 20 office buildings (20 acres per office building) for use at Fort Beatrix Army planners have identified 400 acres of uneven land near Fort Beatrix that it owns, and it has been valued at $45K per acre The cost to the army of constructing the first building is $2.25M, and the cost of constructing each additional building increases by $.25M for each building built due to increasing marginal cost of developing the uneven land (i.e., the second costs $2.5M, the third costs $2.75M, and so on) Alternatively, a contracting company is willing to construct any number of office buildings at a flat rate of $3M each Perform all CBA steps to support a decision 24 Mini-case Exercise #3 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED or “what’s the cheapest route to Baghdad?” • Due to the impending drawdown and changing mission requirements, the General Officer overseeing three forward operating bases in Iraq—FOB Ironman, FOB Danger, and FOB Python—has been tasked to come up with 200 soldiers as transportation and logistics specialists within the next six months However, the GO has been given no new growth mandates The 200 must be relocated to Baghdad, which is a distance of 100 mi., 200 mi., and 150 mi from Ironman, Danger, and Python, respectively Each FOB has provided a list of nonessential personnel available for transfer to Baghdad, along with salary data Perform all CBA steps to support a decision 25 ... Boundaries and Parameters Define Problem/Opportunity and Objective CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Define Scope; Formulate Facts and Assumptions Define Alternatives Develop Cost Estimate for. .. are cost- free, and therefore only benefits need to be considered Determine if this reasoning is correct, and determine the appropriate scope for the analysis 11 Scope Exercise CBA 4-DAY TRAINING. .. Pentagon are cost- free, and therefore only benefits need to be considered Determine if this reasoning is correct, and determine the appropriate scope for the analysis Solution: Scoping the cost to