AMERICA’S ARMY: THE STRENGTH OF THE NATION Cost-Benefit Analysis (CBA) Four-Day Training Briefing Step 8: Report Results and Recommendations CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Step 7: Compare Alternatives Version 3.0 (Draft) Last Updated: 10 November 2011 Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more https://cpp.army.mil Step 7: Compare Alternatives 1 Define Define the the Problem/Opportunity Problem/Opportunity and and Objective Objective 7a Compare alternatives using the selection criteria to identify the preferred alternative 2 Define Define the the Scope; Scope; Formulate Formulate Facts Facts and and Assumptions Assumptions UNCLASSIFIED 3 Define Define Alternatives Alternatives 4 Develop Develop Cost Cost Estimate Estimate for for each each Alternative Alternative 7b Identify the billpayer if there is a bill associated with the recommended alternative 7c Identify the positive and negative impacts of the 7d rd order effects What Determine the robustness of the conclusions 7e If anything changes (i.e., assumptions, costs, benefits) would the recommendation change? Identify the high-risk aspects of the recommended alternative and define appropriate risk mitigation measures 6 Define Define Alternative Alternative Selection Selection Criteria Criteria CBA 4-DAY TRAINING SLIDES and must be done to manage the negative impacts? – 5 Identify Identify Quantifiable Quantifiable and and NonNon- Quantifiable Quantifiable Benefits Benefits nd Compare Alternatives 8 Report Report Results Results and and Recommendations Recommendations Step 7: Compare Alternatives Compare alternatives by: Concepts Comparisons of costs with benefits Decision support tools and methods (bringing the CBA together) Sensitivity analysis and Risk assessment CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • • • • Concepts for Comparing Costs with Benefits The CBA process is essentially comparing the costs with the benefits between all alternatives The preferred alternative provides the greatest amount of value Risk and second- and third-order effects should be included in the comparison of alternatives CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • • • Value = Benefit – Costs Aid for Completing - Step 7a Costs Benefits Selection Criteria Unequal Alternative that provides greatest benefits for given cost UNCLASSIFIED Equal Equal CBA 4-DAY TRAINING SLIDES Unequal Subjective reasoning and a fortiori analysis Alternatives ranked in order (based on benefit/cost ratio, net present value, or other relevant criterion) Unequal Equal Most likely CBA Scenario Least costly alternative CBA may not be appropriate Overly Complex Final Recommendation Production Risk of shutdown Local Taxes Competition for Cost Alternative 20 widgets/yr 5% 8% 30 competitors $25 Alternative 15 widgets/yr 8% 6% 20 competitors $15 Alternative 10 widgets/yr 12% 7% 10 competitors $10 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Employees Comparative Methods UNCLASSIFIED Method Description When Used Net Present Value (NPV) Converts future cash flows into present equivalent values and then adds them together When alternatives have the same economic life Benefit/cost ratio (BCR) Compares present value (PV) of benefits with present value of costs When competing alternatives have unequal costs and unequal benefits Break-even Point Identifies point at which cumulative cost of two alternatives equal the cumulative benefits When projects are high-risk, to show when investment costs need to be recovered quickly Subjective reasoning Applies professional judgment as a complement to, or to the exclusion of, quantitative data When professional judgment is considered to be more important Point System Applies objective values to subjective criteria When decision makers wish to narrow the list of alternative solutions to the few that are most suitable CBA 4-DAY TRAINING SLIDES Decision Matrix Allows for multiple criteria to be used to compare alternatives It is a very flexible tool that can be used under many circumstances It can even account for other decision support methods described in this table A Fortiori Analysis Determines whether a strongly favored alternative is still the best choice even when assumptions are When generally accepted intuitive judgment strongly favors one alternative formulated that put that alternative at a disadvantage Best Practices • Compare the incremental costs with the incremental benefits • Compare the one or two most relevant benefits with the costs • Find the “knee in the curve” or optimal value solution CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Practices: Common Mistakes • “Over-averaging” for sake of simplification: – Example:  • UNCLASSIFIED CBA 4-DAY TRAINING SLIDES that should have been rejected in step Assuming away cost: – Examples:     • “Fort Hood data is representative of all bases.” These are examples of flawed assumptions “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 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Common Mistakes: Over Simplification Cost ($M) Benefit Status Quo 30 Good Added capability (Alternative 1) 45 Very Good Greatly added capability (Alternative 2) 55 Excellent Which alternative has the best value? 10 Quick Review • Comparing the costs with benefits of each alternative is a required part of the CBA methodology • Sensitivity analysis is a technique that analyzes whether changes in assumptions, quantitative • Billpayers are the sources that will fund the costs of alternatives CBA 4-DAY TRAINING SLIDES UNCLASSIFIED values, or priorities will affect the recommendation 32 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 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED process, with the final goal of arriving at a model for mass production and sale 33 Review Exercise: Henry Ford • Identify selection criteria and compare each of the following Courses of Action: COA1 (Status Quo): Leave the car in the garage, nothing else COA2: Disassemble the car and reassemble it outside the garage COA3: Obtain permission of garage landlord to widen the garage door CBA 4-DAY TRAINING SLIDES UNCLASSIFIED – – – 34 Step 8: Report Results and Recommendations CBA Decision Package: • Preferred format is a narrative or PowerPoint • Accompany with a decision briefing • Write it in such a way that a layman can understand the topic UNCLASSIFIED Results and Recommendations: • Summarizes the analysis • Makes conclusive statements about each of the alternatives – • Results address how the alternatives were ranked using the criteria developed in Step • Document all data and information used in Steps 1-8 – CBA 4-DAY TRAINING SLIDES The recommended alternative should follow Provide supporting information so reviewers can understand how Steps 1-8 were developed Questions for the Reviewer: - Does the package contain all key elements that are accompanied with supporting documentation? - Does the recommended alternative address the problem, and is it consistent with the assumptions and constraints? - Does the analysis explain how the recommended alternative is the best one to satisfy the selection criteria? 35 Key Elements for Documentation The CBA’s quality and comprehensiveness may be enhanced by the following supplementary content: • Glossary UNCLASSIFIED – • CBA 4-DAY TRAINING SLIDES Timeline – • Defines unfamiliar abbreviations, acronyms, and terms used in the CBA Displays key dates and actions associated with the CBA in terms of its development and/or implementation Coordination Sheet – Identifies who will need/have to review the CBA 36 Briefing the Results of the CBA Briefing Format: • This is a suggested but not required format – This is just a suggestion The actual briefing for a CBA (or any briefing, for that matter) should be determined based on the briefer’s style, the known preferences of the individual being briefed, and the subject matter UNCLASSIFIED – • An example has been provided in the CBA guide It is not a substitute for a well documented CBA in narrative form – The CBA coordinator, the decision makers, and stakeholders should collaborate to determine the content and CBA 4-DAY TRAINING SLIDES format of the CBA decision brief as they will have differing preferences 37 CBA Workflow Automation Tool CBA Start Registration, Development and (Capability Gap) Submission CBA Validation Requirements Approval • • • • Proponent organizations: • Register CBA online Develop and submit CBAs online • Organization validates the CBA methodology • Requirement approval Resource Approval • use CBAs to make Make resource-informed resource- informed decisions • Resource approval forums forums use CBA to: decisions Validate and approve • Identify tradeoffs and • Decide funding approval requirements Accuracy and completeness billpayers decision with value proposition linked to command’s strategic priorities UNCLASSIFIED • Proponent leadership endorses submission online End CBA 4-DAY TRAINING SLIDES https://cpp.army.mil/ Register and submit your CBA online Draft Submitted Lead Analyst CBARB Final Review Review Review Completed 38 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED https://cpp.army.mil/ 39 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED CBA Workflow Tool 40 UNCLASSIFIED Quick Review • Document the CBA narrative and share the results with stakeholders for approval • CBA templates are optional tools that can be used to brief the results of the CBA • Include all documentation and calculations in back up • Ensure that the CBA clearly describes the value proposition, and highlight how the benefits CBA 4-DAY TRAINING SLIDES outweigh the cost, risks, and trade offs 41 CBA 4-DAY TRAINING SLIDES UNCLASSIFIED FOUR DAYS FOUR 42 Mini-case Exercise #7 or “can you hear me now?” or “what’s the expected value?” • U.S Army Special Operations Command maintains a specialized communications link between the Commander, USASOC, the Chief of Staff and Vice Chief of Staff, Army, and Team Leaders in the field during highly sensitive counter-terrorism missions The link provides video and voice transmissions that are typically delayed by 30 seconds Currently, $2M per month is spent on operating and maintaining the communications link: mostly consisting of payments to the National Security Agency for “satellite bandwidth.” The NSA has recently launched into orbit a new satellite that promises shorter transmission delays: typically 10 seconds, but with a 20% risk of 20 second delays The satellite takes advantage of recently developed technology: costs to the Army for the first month are set at $10M, and are projected to decrease based on an 85% learning curve ($10M for the first month, 0.85 x UNCLASSIFIED $10M per month for the next two months, 0.85 x 0.85 x $10M per month for the next four months, 0.85^3 x $10M per month for the next eight months, 0.85^4 x $10M per month for the next sixteen months, etc.), though there is a 40% risk that costs will only decrease according to a 90% learning curve • Because time delay is the overwhelming factor in communications for counter-terrorism operations, Army planners have assigned a 100% benefit CBA 4-DAY TRAINING SLIDES weight to signal delay time The benefit score will be determined by the function , where t is the expected time delay in seconds 43 Mini-case Exercise #8 or “to insource or not to insource, that is the question” • Currently, a contractor provides 12 translators to a SIGINT battalion, each contracted for 1885 hours annually, on a government contract costing $1.2M per year The battalion commander would like to evaluate the option of insourcing the labor to annual productivity is estimated at 1740 hours each Determine whether insourcing would be more cost effective than the status quo CBA 4-DAY TRAINING SLIDES UNCLASSIFIED Army civilians The total burdened cost per civilian is $85,209 and the estimated 44 Mini-case Exercise #9 or “I’ll gladly pay you Tuesday for air conditioning today” • OA22 has invited a contracting team to the Pentagon to inspect its centralized HVAC system Following the inspection, the contractor reported minor damage to the HVAC system, and offers to replace it Despite the damage, the HVAC system continues to function at the same capacity, although with risk of damage to the building You assess that in any one year, there is a 15% chance of damage being done In the event that there is damage, you assess that the average amount of damage will be $200K if occurring within the first year, $300K if occurring during the second year, $400K if occurring during the third year, etc (increasing by $100K each year) If UNCLASSIFIED you decide to replace the HVAC system, the contractor has offered a payment program of $256K for the first year of ownership, $128K for the second year, $64K for the third year, etc (reduce by 50% each year) The expected life cycle of this HVAC system is years Alternatively, you may buy the same HVAC system from a separate contractor at a cost of $100K for the first year, and $90K for every subsequent year Under this special program, the contractor will replace the HVAC system at the end of its life cycle without any additional material cost (operations & maintenance, replacement costs not included) All costs are given in constant FY12 dollars CBA 4-DAY TRAINING SLIDES Perform all steps of the CBA process to support a course of action 45 Mini-case Exercise #10 • The Captain of the Pequod has ordered a cost-benefit analysis to determine the optimal number of rowboats to deploy to pursue a whale sighting As defined by the Commander, the selection criteria are manpower, stealth, and ease of sustainment, that the total mission cost can be estimated at $2200 for each rowboat involved in the hunt Each rowboat can transport 15 fishermen CBA 4-DAY TRAINING SLIDES UNCLASSIFIED with weights of 0.5, 0.3, and 0.2, respectively You have been told as a rule of thumb 46 ... resource-informed resource- informed decisions • Resource approval forums forums use CBA to: decisions Validate and approve • Identify tradeoffs and • Decide funding approval requirements Accuracy and. .. Exercise: Sensitivity Analysis • $20 $3.33 $16 $2. 78 COA-1 Perform a sensitivity analysis COA-2 COA-3 on the weight of Lethality in this Decision matrix Test for Cost = $ quantifiable cost – $ quantifiable... Comparisons of costs with benefits Decision support tools and methods (bringing the CBA together) Sensitivity analysis and Risk assessment CBA 4-DAY TRAINING SLIDES UNCLASSIFIED • • • • Concepts for Comparing