Cost beniefit analysis training for decision makers and manager step0

PDI CBA WORKSHOP

UNCLASSIFIED

AMERICA’S ARMY: THE STRENGTH OF THE NATION

Cost Benefit Analysis (CBA)
Training
for
Decision Makers and Managers

FM LEVEL III
29 May 2015

Visit our CBA Website for more information regarding locations,
signing up, upcoming training sessions, and more


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PDI CBA WORKSHOP

UNCLASSIFIED

Welcome

• 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 resourceconstrained environment.

AUSA National Meeting
October 2010

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UNCLASSIFIED
PDI CBA WORKSHOP

Ar
m
A Cost Culture entails developing – through leadership, y
education, discipline, and experience an
Co
understanding of the importance of:
st
– making cost-informed decisions
Cu
– making effective trade-off decisions to achieve
lt
the best possible use of limited resources
ur
– holding people accountable for understanding
e
and being able to explain the costs of their
organizations, products, services, and customers
– focusing on continuously improving the efficiency
and effectiveness of operations

• Culture: Common Beliefs and Behavior in an Organization
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UNCLASSIFIED
PDI CBA WORKSHOP

Co
m
pa
Cost Benefit Analysis—Making the case for a project or proposal:
Weighing the total expected costs against the total expected benefits
ra
over the near, far, and lifecycle timeframes from an Army enterprise perspective.
tiv
BENEFITS
COSTS
e
The total of quantifiable (e.g.
 Quantifiable costs
cycle-time) and non Direct
A
quantifiable (e.g. quality)
 Indirect
benefits
na
 Initial/Start up
Financial benefits
 Sustainment
Return on Investments lys

 Procurement
Cost Avoidances
is
Break-even Pt
 Non Quantifiable Costs
 Life/Safety/Health
A
Non-Financial benefits
Greater capability
 Perception/Image
Faster availability
pp
 Opportunity
Better quality
 Risk/Uncertainty
Improved morale
ro
 Political
Other?
ac
BENEFITS MUST BALANCE OR OUTWEIGH COSTS
h
1. Develop the Problem Statement;
Define the Objective and the Scope



2. Formulate Assumptions; and
Identify Constraints
3. Document Current State

(Status Quo)



4. Define Alternatives with
Cost Estimates

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
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5. Identify Quantifiable and
Non- Quantifiable Benefits




6. Define Alternative
Selection Criteria

7. Compare Alternatives
8. Report Results and
Recommendations



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Slide: 4


Army’s Demand for CBA

1000
800

UNCLASSIFIED

600
400
200
0

Submitting Organizations

Total CBAs Created

1200

278

7

20

33

57

361

453

528

640

715

775

825

963 992
883 924

20.00%

160

1.00%

16.00%

AMC
ARNG
ASCC
DRU/FOA
FORSCOM
HQDA
TRADOC

24.00%

CBAs by Decision Forum
PDI CBA WORKSHOP

3.00% 4.00%

32.00%

CBAs by DOTMLPF

30.55%

31.12%

5.00% 3.00%
Concept Plan
AROC
Legislative Proposal

FDU
Other

3.95%

15.00%
5.00%

35.00%

1.00%
8.00%

Doctrine
Organization
Training
Materiel
Leadership
Personnel
Facilities

36.00%
26.38%

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Training Objectives
• 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

PDI CBA WORKSHOP

UNCLASSIFIED

Objectives:

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PDI CBA WORKSHOP

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CBA METHODOLOGY

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What is a CBA?

UNCLASSIFIED

Cost-Benefit Analysis:
• 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.

PDI CBA WORKSHOP

• In English:
1.
2.
3.
4.

Define a problem or opportunity
Identify alternatives
Determine their costs and benefits
Evaluate and select the best alternative

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Why Do We Need CBAs?

PDI CBA WORKSHOP

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Purpose:
• 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

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Surprisingly Simple Concept

PDI CBA WORKSHOP

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CBA is easy to do!
It’s not rocket science.

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Eight-Step Methodology
1. Define Problem/Opportunity and Objective

UNCLASSIFIED

2. Define CBA Boundaries and Parameters
3. Define Alternatives
4. Develop Cost Estimate for each Alternative

PDI CBA WORKSHOP

5. Identify Quantifiable and Non-Quantifiable Benefits
6. Define Alternative Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations
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UNCLASSIFIED

Cost Benefit Analysis and the MDMP
CBA Methodology

Military Decision-Making
Process (MDMP) *

1. Define Problem/Opportunity and Objective

Receive Mission

2. Define Scope; Formulate Facts and
Assumptions

Analyze Restated Mission (includes assumptions
and constraints)

3. Define Alternatives

Develop Alternatives

4. Develop Cost Estimate for each Alternative
Analyze Alternatives

PDI CBA WORKSHOP

5. Identify Quantifiable and Non-Quantifiable
Benefits
6. Define Alternative
Selection Criteria
7. Compare Alternatives
8. Report Results and Recommendations

Compare Alternatives

Approve Alternatives
Issue Implementing Orders

* As prescribed in FM 5-0.
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UNCLASSIFIED
PDI CBA WORKSHOP

C
B
Objective
A
Recommendation
Assumptions
is
Sensitivity Analysis
Alternatives
N
Compare
Alternatives
o
Cost
Estimates
Benefits
Selection
t
Estimate
Criteria
a
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 Li
guidance.

n




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UNCLASSIFIED
PDI CBA WORKSHOP

RESOURCE INFORMED DECISION
MAKING

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PDI CBA WORKSHOP

UNCLASSIFIED

A Note About Perspective

Although
Although this
this course
course draws
draws largely
largely on
on

policies
policies and
and activities
activities at
at Headquarters,
Headquarters,
Department
Department of
of the
the Army,
Army, the
the content
content
and
and guidance
guidance are
are readily
readily transferrable
transferrable
to
to other
other agencies
agencies (e.g.
(e.g. Navy,
Navy, AF…)
AF…) and
and
levels
levels of
of command.

command.

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•

UNCLASSIFIED

•
•

PDI CBA WORKSHOP

•

D
e
Initial decisions are most important!
– Drive subsequent decisions
ci
– Largest driver of impact
In the Army, requirements decisions usually precede design or si
funding decisions
Example 1: Personal Transportation Decision Tree
o
1. Public vs Private auto to commute to work
n
2. If private auto, what type, model?
3. Funding decision on financing, leasing, etc.

P
Example 2: Army Mobility Requirement Decision Tree
1. DOTMLPF decision
oi
2. If material, what type of equipment?
3. Tradeoff decisions
n
4. Vendor & Model selection
5. Funding and schedule decisions
ts

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UNCLASSIFIED
PDI CBA WORKSHOP

• 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

S
u
bj
e
ct
o
f
A

n
al

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

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PDI CBA WORKSHOP

UNCLASSIFIED

•
•
•
•

S
p
Cost is the consumption of resources
Type of funding or appropriation should not e
affect cost
ci
Approved funding ≠ Free of cost
al
What if something is funded (funding reqt exists)
N
or unfunded (no funding reqt)?
o

– Funded ≠ Free
– Spending ≠ cost of requirements
t
– Cutting overhires ≠ savings
e
– People/equipment already in use ≠ requirements
s

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PDI CBA WORKSHOP

UNCLASSIFIED

GOOD CBA GUIDANCE

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BA Four-Day TRAINING SLIDES

UNCLASSIFIED

Army CBA Guide
• Establishes the standard procedure for
preparation of CBAs
• 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

evaluated.

located at under “Documents” tab.

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Questions for Reviewers
CBARB will determine whether the CBA is technically and functionally sound

PDI CBA WORKSHOP

UNCLASSIFIED

•
•
•
•

•
•
•
•

•
•
•
•
•
•

•

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?

Alternatives Development

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?

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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

PDI CBA WORKSHOP

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Commo
n
Mistakes

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Normalization of Value
Normalization:
•

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
Common methods:
–
–

Discounting
Constant (base) year

PDI CBA WORKSHOP

UNCLASSIFIED

–
–
–

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Scope

PDI CBA WORKSHOP

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• 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.

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Boundaries and Parameters

– Difficulty of analysis in an unbounded problem: how to achieve world
peace.
– Possibility of analysis in a bounded problem: how to determine the best
balance between network connectivity, implementation risk, and total
costs utilizing current off the shelf technologies.

PDI CBA WORKSHOP

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• Boundaries and parameters provide the limiting conditions that
make a controlled analysis of alternatives possible. Consider:

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