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Step 7: Comparison of Alternatives. 7a. Compare COAs using alternative selection criteria to identify the preferred COA. 7b. If there is a bill associated with the recommended COA, identify the billpayer.
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Step 7: Comparison of Alternatives 7a. Compare COAs using alternative selection criteria to identify the preferred COA. 7b. If there is a bill associated with the recommended COA, identify the billpayer. 7c. Identify the positive and negative impacts of the second- and third-order effects. What must be done to manage the negative impacts? 7d. Determine the robustness of the conclusions. If anything changes – assumptions, costs, benefits, etc. – would the recommendation change? 7e. Identify the high-risk aspects of the recommended COA and define appropriate risk mitigation measures.
Heart of Comparative Analysis • The essence of the CBA process is in comparing two or more courses of action in order to identify the preferred alternative. • As a general rule, the preferred alternative is the alternative that provides the greatest amount of benefit in relation to its cost (Best Value!). • Value = Benefit – Costs CBA is Value Analysis UNCLASSIFIED
Aid for Completing Step 7a UNCLASSIFIED
Best Practices • For most comparative analyses delta costs are more informative • Present the single (or two) most important benefit(s) to compare against cost • Find the “knee in the curve” or optimal value solution UNCLASSIFIED
Common Mistakes • Assuming away the problem • Assuming away cost • “Over-averaging” for sake of simplification • Show examples of each (or at least last one) UNCLASSIFIED
Simple Case Which COA is the best value? UNCLASSIFIED
Data Analysis • Data in and of itself is of little use. • Analysis takes data and puts it into a format that enables us to make better decisions. UNCLASSIFIED
Optimization Fairly linear relationship Increasing bang for buck Decreasing bang for buck Which COA is the best value? UNCLASSIFIED
Optimization example • Find the “knee in the curve” • Simple linear example • use simplex • Teach solver • Efficient frontier? – or complex example UNCLASSIFIED
Normalization of Value • Facilitates easy value comparison of COAs • Allows comparison of cost today to cost tomorrow • Allows comparison of present and future benefits • Allows comparison of costs and benefits • Appropriate method must be chosen from many choices • Costs and benefits may have to be recalculated based upon chosen method UNCLASSIFIED
(Net) Present Value • The difference between the present value of cash inflows and the present value of cash outflows. • Used to analyze the profitability of an investment • Costs (outflows) and benefits (inflows)are in dollars • Value presented as a single number • Only works if costs and benefits are monetary UNCLASSIFIED
PV Merits Pros • Most fundamental analysis • Very easy to compare results • Incorporates discount rate which can be represent risk Cons • Limited use in the Army • Benefits are purely monetary • Discount rate application can be difficult UNCLASSIFIED
Example • Which costs more? • Present costs in base year. • Present costs in present value or NPV. Current/Then year $MM Inflation 3% Discount Rate 5% UNCLASSIFIED
PV Example • Which costs more? Current/Then year $MM Constant/Base year $MM PV $MM discounted at 5% rate UNCLASSIFIED
PV Example • Relative costs • Compare annual savings • Discounts at cost of capital Current/Then year $MM NPV $MM discounted at 5% rate UNCLASSIFIED
Benefit/Cost Ratio • Easy to compare different alternatives • Total benefit obtained per unit of cost • Projects with greater BCRs are usually given priority over those with smaller BCRs • Alternatives that have a BCR greater than one (1) are considered viable UNCLASSIFIED
BCR Examples • Simplified example with dollars • Operational example • Utility/dollar • Dollars/kill UNCLASSIFIED
Decision Matrix • Tool compares benefits and costs to produce a single value score • Army staff officers taught to include in decision briefs UNCLASSIFIED
Decision Matrix Merits Pros • Easy to use • Normalizes costs and benefits • Familiar tool Cons • Easy to introduce error • Highly judgmental • Discourages accurate identification of value • Easy to argue against results • Scoring is difficult UNCLASSIFIED
Extraneous Data • Cost Drivers capture the primary costs of a proposal • Given a list of benefits, is there a primary consideration? • Focusing on a long list can distract decision makers from true impacts UNCLASSIFIED
Example • Benefits: • Increased transaction rate • Better working area • Faster email processing • Less administrative burden • How do you present the value? UNCLASSIFIED
“Cost Free” Analysis • Alternatives present savings against the status quo or baseline case • Or the analysis costs are non-monetary UNCLASSIFIED
“Free” Example • Problem: After a Congressional inquiry, G-3/5/7 proposes formation of a new organization to track and coordinate MRAP related issues similar to DAMO-AV, meets 10 new requirements, I to X. • Status Quo: No new office, requirements I - V currently met by AMC and TACOM. • COA 1: Fill organization with 23 Military and Civilian personnel by eliminating current AMC MRAP office of 30. • COA 2: Fill organization with 23 Military and Civilian TACOM personnel. UNCLASSIFIED
“Free” Example UNCLASSIFIED
Double Counting of Criteria Move to criteria Impact of using personnel is counted both as a cost and a contra-benefit UNCLASSIFIED
Step 7b: Billpayers • Billpayers are the funding sources that have been identified to cover the cost of the recommended COA. • In most cases, the individual or team developing the CBA won’t have the authority to identify billpayers. This requires collaboration with the organization’s resource manager and prioritizer. • Savings can be used as a billpayer, but cost avoidances cannot. • Savings: A cost reduction that enables a manager to move funds from one function to another • Cost avoidance: A cost reduction that does not enable a manager to move funds. Move to criteria (affordability) UNCLASSIFIED CBA Training Slides
Step 7c: 2nd- and 3rd-Order Effects • Second- and third-order effects are the “ripple effect” of the recommended COA: “The recommended COA will solve our problem, but it will also create an additional factor we will have to deal with.” • The cost of many CBAs is purely a 2nd or 3rd order effect (e.g. policy change). • The scope or domain often limit the # of next order effects. Move to criteria (affordability) UNCLASSIFIED CBA Training Slides
Risk Assessment • Risk assessment describes risks that can impact the achievement of stated benefits or the cost of solving the business problem. For each risk, assess the likelihood of occurrence and develop a mitigation strategy. • Ways to incorporate risk into value calculation: • Sensitivity analysis • Discount factors UNCLASSIFIED CBA Training Slides
Sensitivity Analysis • Sensitivity analysis identifies the impact on the recommendation should any element of the analysis change. • Sensitivity analysis is a good means to address risk impacts UNCLASSIFIED CBA Training Slides
Example • Variations in assumptions that change cost and benefits • @risk or crystal ball run • Change costs • change benefits • Change decmat weights UNCLASSIFIED
Questions for Steps 7d and 7e • How sensitive is the recommendation to possible changes in costs, benefits, assumptions, etc? If the recommendation is highly sensitive to changes, has more in-depth analysis been done? • Which elements of the CBA require sensitivity analysis? • Test only those elements for which there is considerable uncertainty or risk. • Can include any element: Assumptions, constraints, costs, benefits, weighting of selection criteria, etc. • Address sensitivity from either or both perspectives: • What is the impact of a change of such and such a magnitude? • How large a change can occur before the recommendation changes? • Have all reasonably likely risks and their impacts been identified? Are the recommended mitigation approaches adequate? Are they affordable? UNCLASSIFIED
Step 8: Report Results and Recommendations • Preferred format for documenting the CBA is a narrative. This will probably be accompanied by a decision briefing. • Results and recommendations summarize the analysis and make conclusive statements about the comparisons of alternatives. • The results address how the alternatives were ranked using the criteria developed in Step 6. Following a clear statement of the conclusions, there should be a firm recommendation regarding the preferred alternative. • All data and other information used in Steps 1-8 must be adequately documented. Supporting information should be identified so decision makers and analysts can understand how Steps 1-8 were developed. • Questions for the reviewer: • Does the package contain all key elements, accompanied by supporting documentation? • Does the recommended COA address the problem, and is it consistent with the assumptions and constraints? • Does the analysis explain how the recommended COA is best at satisfying the selection criteria?
Practice Step 8 • We will discuss Step 8 by reviewing a notional CBA decision briefing for the APS practical exerciseNote: The CBA Guide, available at the Cost & Performance Portal, includes a narrative report for the APS example. Decision package must present a strong value proposition. That is, it must clearly show that the benefits of the recommended COA more than justify the costs and risks. UNCLASSIFIED