Cost beniefit analysis training for decision makers and manager step0

e A na lysis A pp ro ac h Cost Benefit Analysis—Making the case for a project or proposal: Weighing the total expected costs against the total expected benefits over the near, far, and l

29 May 2015 Visit our CBA Website for more information regarding locations,

signing up, upcoming training sessions, and more

https://cpp.army.mil

AMERICA’S ARMY: THE STRENGTH OF THE NATION

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FM LEVEL III

• The Army's senior leaders are committed in making

resource-informed decisions by means of CBAs

• Army leaders have identified cost culture as one of the

highest priorities in adapting to an increasingly

resource-constrained environment.

AUSA National Meeting

October 2010

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A Cost Culture entails developing – through leadership ,

education , discipline , and experience an

understanding of the importance of:

– making cost-informed decisions – making effective trade-off decisions to achieve the best possible use of limited resources

– holding people accountable for understanding and being able to explain the costs of their

organizations, products, services, and customers – focusing on continuously improving the efficiency and effectiveness of operations

Ar m

y Co

st Cu lt ur e

• Culture: Common Beliefs and Behavior in an Organization

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e A na lys

is A pp ro ac h

Cost Benefit Analysis—Making the case for a project or proposal:

Weighing the total expected costs against the total expected benefits

over the near, far, and lifecycle timeframes from an Army enterprise perspective.

BENEFITS MUST BALANCE OR OUTWEIGH COSTS

6 Define Alternative Selection Criteria

5 Identify Quantifiable and Non- Quantifiable Benefits

5 Identify Quantifiable and Non- Quantifiable Benefits

4 Define Alternatives with Cost Estimates

4 Define Alternatives with Cost Estimates

3 Document Current State

1 Develop the Problem Statement;

Define the Objective and the Scope

1 Develop the Problem Statement;

Define the Objective and the Scope

Slide: 4

Total CBAs Created

CBAs by Decision Forum

Other

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• Understand Army’s CBA methodology

• Understand how to use CBA to improve decision making

• Develop managerial guidelines to encourage good analysis

• Explore development of policies and regulations

• Illustrate the methodology

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• Is a structured methodology used to identify alternative solutions

to a problem, determine the costs and benefits of each

alternative, define the appropriate decision criteria, and select

the best alternative.

• Produces a strong value proposition – a clear statement that the benefits outweigh the costs and risks.

• In English:

1 Define a problem or opportunity

2 Identify alternatives

3 Determine their costs and benefits

4 Evaluate and select the best alternative

What is a CBA?

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• Supplement (but not replace) professional experience, subject

matter expertise, and military judgment with rigorous analytical techniques

• Make best possible use of constrained resources

• When making resource decisions:

– Ensure that all decisions are resource-informed

– Treat cost a consideration from the outset, not as an afterthought

– Understand how much benefit will be derived

– Identify billpayers

– Consider second- and third-order effects

Why Do We Need CBAs?

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Surprisingly Simple Concept

CBA is easy to do!

It’s not rocket science.

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6 Define Alternative Selection Criteria

5 Identify Quantifiable and Non-Quantifiable Benefits

4 Develop Cost Estimate for each Alternative

3 Define Alternatives

2 Define CBA Boundaries and Parameters

1 Define Problem/Opportunity and Objective

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Cost Benefit Analysis and the MDMP

8 Report Results and Recommendations

7 Compare Alternatives

6 Define Alternative Selection Criteria

6 Define Alternative Selection Criteria

5 Identify Quantifiable and Non-Quantifiable

Analyze Restated Mission (includes assumptions

and constraints)

Analyze Restated Mission (includes assumptions

and constraints) Receive Mission

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A

is N o

t

a Li n e a

r P r o c e s s

Compare Alternatives

Recommendation

Cost Estimates

Benefits Estimate Sensitivity Analysis

 At any step in the process, the team’s findings and analysis might make

it necessary to revisit previous steps.

 Significant findings might require asking the decision maker for revised

guidance.

Although this course draws largely on

policies and activities at Headquarters,

Department of the Army, the content

and guidance are readily transferrable

to other agencies (e.g Navy, AF…) and

levels of command.

Although this course draws largely on

policies and activities at Headquarters,

Department of the Army, the content

and guidance are readily transferrable

to other agencies (e.g Navy, AF…) and

levels of command.

A Note About Perspective

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n P oi n ts

• Initial decisions are most important!

– Drive subsequent decisions

– Largest driver of impact

• In the Army, requirements decisions usually precede design or

funding decisions

• Example 1: Personal Transportation Decision Tree

1 Public vs Private auto to commute to work

2 If private auto, what type, model?

3 Funding decision on financing, leasing, etc.

• Example 2: Army Mobility Requirement Decision Tree

1 DOTMLPF decision

2 If material, what type of equipment?

3 Tradeoff decisions

4 Vendor & Model selection

5 Funding and schedule decisions

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ct o

f A n al y si s

• Which decision is analysis supporting?

• Addressing multiple decision points increases number of alternatives

– 3 decisions and 2 choice/each =8 COAS

– 3 decisions and 3 choice/each =27 COAS

• Addressing multiple decisions simultaneously requires addressing uncertainty and risk with more assumptions!

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al N o t e

s o

n C o

st

• Cost is the consumption of resources

• Type of funding or appropriation should not

affect cost

• Approved funding ≠ Free of cost

• What if something is funded (funding reqt exists)

or unfunded (no funding reqt)?

– Funded ≠ Free

– Spending ≠ cost of requirements

– Cutting overhires ≠ savings

– People/equipment already in use ≠ requirements

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• All preparers should refer to and follow the

procedures set forth in the CBA guide These are the standards against which all CBAs will be

• Is each of the alternatives feasible?

• Are the alternatives distinctly different?

• Are there obvious alternative that are not presented?

• Does the CBA adequately identify (with supporting

documentation) the costs and benefits of each alternative?

Accuracy

• Is the CBA technically correct (math, formulas, models, data sources, etc.)?

• Is the CBA functionally correct (facts, not opinions)?

Analysis and Conclusions

• Are the decision criteria clearly identified?

• Does the CBA use appropriate analytical techniques for the situation?

• Is the recommended alternative compatible with the assumptions and constraints?

• Does the analysis clearly explain how the recommended alterative is better than the others at satisfying the decision criteria?

• Does the recommended alternative satisfy the Problem Statement?

• Have the risks been adequately expressed in the analysis and recommendation?

• Does the decision briefing (or other final product) support the recommended alternative?

Analysis and Conclusions

• Are the decision criteria clearly identified?

• Does the CBA use appropriate analytical techniques for the situation?

• Is the recommended alternative compatible with the assumptions and constraints?

• Does the analysis clearly explain how the recommended alterative is better than the others at satisfying the decision criteria?

• Does the recommended alternative satisfy the Problem Statement?

• Have the risks been adequately expressed in the analysis and recommendation?

• Does the decision briefing (or other final product) support the recommended alternative?

CBARB will determine whether the CBA is technically and functionally sound

Problem Statement, Assumptions, and Constraints

• Is the Problem Statement clear, and does it accurately identify the issue?

• Are the assumptions clearly stated and realistic?

• Are all relevant constraints identified?

• Is the Problem Statement, assumptions, or constraints structured in a manner that is clearly intended to favor one alternative?

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• Problem stated as predetermined solution instead of

as problem, as in the form, “We need more money.”

• Problem does not reflect the stakeholder concerns

• Problem is based on anecdotal information

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• The values of alternatives can easily be compared

– Costs of today with costs of tomorrow

– Present with future benefits

– Costs with benefits

• Appropriate method must be chosen from many choices

• Costs and benefits may have to be recalculated based upon chosen method

• 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

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Boundaries and Parameters

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• Beyond defining the status quo, there is no prescribed doctrine or

methodology for developing other courses of action

• So long as facts, assumptions, and scope are taken into account,

any COA that falls within the boundaries and parameters thus

defined can be a potential solution to the problem statement

Only COAs that are potentially optimal solutions should be

included in the CBA.

Developing Alternative Courses of Action

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e A lt e r n a ti v e s

• Too many alternatives is as bad as too few

• Alternatives should illustrate the realm of

feasible solutions

• In analysis, an optimal solution often exists

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Presenting 3 of these does not help

s t h

e S t a t u

s Q u

o f o

r V ia bi li t

y

Is the status quo a viable alternative?

• The CBA must be forward-looking, not historical Therefore, the status quo is not always static—it must account for scheduled changes that might occur

within the timeframe of the analysis.

• Ask this question: Can the status quo solve the problem, given the scope

and facts/constraints we’re dealing with?

– Yes: Status quo is viable

– No: Status quo is not viable

• For example:

– Problem: A storage depot is given a new task to store sensitive items that cannot

be exposed to the weather– Fact: Existing storage facilities are concrete pads with overhead cover but no

walls– Conclusion: Status quo cannot solve the problem and is therefore not viable

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If the status quo is not viable:

 Will inclusion in the analysis provide a valuable reference?

 Why the status quo was rejected?

 “Fort Hood data is representative of all bases.”

• Assuming away cost:

– Examples:

 “Year-end funds will be available,” when that’s not the case

 “Higher headquarters will pay for it.”

 “Other organizations will pay for it.”

 “Military personnel are free.”

• Assuming away the problem:

– Example:

 “Unused office space is available.”

 “Chief of Staff said we need this.”

 Adding a layer of oversight will increase process efficiency

Common Mistakes 2

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These are examples of flawed assumptions that should have been

rejected in step 2

These are examples of flawed assumptions that should have been

rejected in step 2

• “Green (fill in blank, i.e., funding, status…) for

$55M is the preferred alternative”

The Cost of a Green Chiclet

Metric Benefit Score/Rank Cost

One of the best ways to elucidate the resource-informed decision to

senior leadership is to include a Decision Matrix in the Decision Brief.

Comparing Two

or More Alternatives in Terms of Cost &

Benefits

Comparing Two

or More Alternatives in Terms of Cost &

 Decision Matrix Rating or Ranking

Cost = $ quantifiable cost – $ quantifiable benefit or saving

Benefit = $ non-quantifiable benefit and $ non-quantifiable risk

COA-1 COA-2 COA-3

COA-1 COA-2 COA-3

Rating: 1 (worst)

to 9 (best)

• The _ headquarters has staffed a proposal

to align the interests of the staff and now that is needs funding, the CBA needs to be started…

• What is the cost of a new conference room?

• When buying a car, I should compare the forty

six models that fit my criteria in order to cover

the full spectrum of decisions.

Midpoint Review

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A P ol ic ie s: O S

D a n

d t h

e A r m y

• “each unfunded requirement and new or expanded program…be accompanied by a thorough cost-benefit analysis”

Department of Army Directive (Jan 07, 2011) (Dec 30, 2009)

The Secretary of Defense Directive (Dec 27, 2010) (Aug 16, 2010)

• “every new proposal

or initiative will come

with a cost estimate”

• “effective 1 Feb 2011,

calculate costs

associated with

[studies & events]”

• “Require a cost estimate for all program and policy proposals”

• “use Cost-Benefit Analysis (CBA) or similar analytical approaches/tools to support resource- informed decision making”

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• CBA results and efficiencies comply with Department of Defense,

Department of the Army, and Congressional guidance

• Use CBA to:

– Make resource-informed decisions– Deliver strong value proposition for the Army

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• USA/VCSA memo was sent to

HQDA principal officials (see

back-up section for complete list

of addressees)

• As expected, the requirement is

“trickling down.”

– HQDA officials are requesting

CBAs from the field

– Subordinate commands are

requiring CBAs internally

 Issues presented to HQDA forums/processes:

 Issues that are important to the Army leadership, OSD, or

Congress

CBAs Requiring HQDA Review

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– POM/BES – Army Campaign Plan (ACP) – Army Requirements and Resourcing Board (AR2B)

– Force Design Update (FDU)

– Army Requirements Oversight Council (AROC)

– Training Resources Arbitration Panel (TRAP)

– … and more to follow

– Methodology and logic

• DASA-CE decision, based on CBARB

recommendation:

– Is the CBA suitable or adequate to support

decision making?

– DASA-CE approval is not approval of the

recommendation in the CBA

Role of CBA Review Board (CBARB)

 Appropriate DASA(CE) divisions

 PEG representatives (as determined by PAED)

 ABO appropriation sponsors

 HQDA functional proponents

 Manpower specialist from G-1

 Other functional proponent(s)

Commands and installations are encouraged to establish similar

teams to review and validate CBAs

s

of R ev ie wi n

g

a C B A

Deputy Assistant Secretary of the Army (Cost and Economics) (DASA(CE)) CBA Review Board (CBARB)

Analyst/Functional Proponent

Decision-Making Individual/Body

Cost Benefit Analysis and Supporting Documentation

Assessment: Is the CBA

suitable to support decision

making?

Tasking: Develop a CBA

Recommendation

The individual or body that needs the CBA

to support a decision Could be a PEG, HQDA staff principal, ACP process, BRP process, etc.

* CBA may be submitted by analyst or decision-making body Decision-making body is responsible for ensuring the CBA is submitted.

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w a n

d C o n d u

ct o

f C B A s

• Real life: Interested (i.e biased) stakeholder usually

conducts analysis

• Sensitivity analysis

– Good way to check CBA

– Sensitivity to assumptions validates analysis

– Enables reviewer to understand analysis

• Review of CBA is often a good time to check sensitivities

– Reviewer should conduct analysis

– Memo is good place to show sensitivities

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