Cost-Benefit Analysis (CBA) Four-Day Training Briefing Day 1 CBA Introduction and Overview

1. AMERICA’S ARMY: THE STRENGTH OF THE NATION Cost-Benefit Analysis (CBA) Four-Day Training Briefing Day 1 CBA Introduction and Overview Visit our CBA Website for more information regarding locations, signing up, upcoming training sessions, and more https://cpp.army.mil 25 June 2012

2. 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 resource-constrained environment. AUSA National Meeting October 2010 Mr. Stephen G. Barth Deputy Assistant Secretary of the Army (Cost & Economics)

3. Class Participation Guidelines Participants are expected to: Attend all four days of training Be punctual for each session Participate in discussions Relate his or her own experiences Ask questions Listen to others Avoid disrupting the class (i.e., side conversations) Refrain from using wireless devices during class: Turn cell phones to either “off,” “silent,” or “vibrate” Unless an emergency, do not use cell phones Please, wait until the break

4. Evaluation Each student will be assigned a final grade based on: Attendance Participation in mini-case exercises Performance on CBA Capstone Case Study Performance on final exam: writing a 2-hour CBA* * Individuals with an average grade (attendance, mini-case exercises, CBA Capstone Case Study) in the top 25% of the class will be waived from the final exam and may leave a day early.

5. Final Exam and Grading Procedures • Given a case study, individually perform and write a CBA (2 hours). • The final product will be evaluated one-on-one by an instructor, and assigned a grade of A (“We think you’ve got it”), B (“Pass, but study more”), or C (“Not yet mastered CBA methodology”). • Grade will determine access to class materials on AKO. • Not grading for grading’s sake, but a chance for free one-on-one hands-on evaluation.

6. Four-Day CBA Training Objectives Objectives: Provide an overview of the Army’s CBA policies, regulations, methodology, and roles Discuss CBA workflow automation tools Offer additional tools to develop quality CBAs, such as: Analytical and graphical tools and techniques Cost analysis methodologies, databases, and models Financial and operational benefits analyses Review case studies and conduct exercises to illustrate the application of these tools and methodology

7. Purpose of the Class • The aim of the class is NOT to give an introduction to Cost-Benefit Analysis. A four-hour class exists for that purpose, as well as a CBA Guide. • The purpose of this course is to provide rigorous, analytical instruction, opportunities for hands-on application in performing Cost-Benefit Analyses, and one-on-one evaluation of work produced.

8. Four-Day CBA Training Schedule Monday Tuesday Wednesday Thursday

9. Day 1 Agenda 1200 – 1330: “CBA Introduction and Overview” 1340 – 1425: “Step 1: Problem/Opportunity and Objective” 1435 – 1520: “Step 2: Define CBA Boundaries and Parameters” 1530 – 1700: Mini-case exercises #1, 2, 3

10. Key Learning Objectives The goal is to understand: What a CBA is Guidance from senior leaders Value of a CBA Responsibilities of key players Role of CBA in HQDA-level decision-making process Process of CBA (high-level perspective) Structure of a CBA Pre-CBA Considerations

11. A Note About Perspective Although this course draws largely on policies and activities at Headquarters, Department of the Army, the content and guidance are readily transferrable to subordinate command and installation level.

12. POLICY GUIDANCE

13. CBA Policies: OSD and the Army The Secretary of Defense Directive (Dec 27, 2010) (Aug 16, 2010) Department of Army Directive (Jan 07, 2011) (Dec 30, 2009) • “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” • “each unfunded requirement and new or expanded program…be accompanied by a thorough cost-benefit analysis”

14. Impact of the Army Directive • 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

15. Army Leadership Expectations Leadership Expectations: • Ensure the CBA results and efficiencies comply with Department of Defense, Department of the Army, and congressional directives • Allocate limited funding to achieve Army’s strategic priorities efficiently • Collaborate with stakeholders to develop effective and efficient solutions • Use CBA to: • Make resource-informed decisions • Deliver strong value proposition for the Army

16. CBA DEFINITIONAND DESCRIPTION

17. What is a CBA? 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. • In English: • Define a problem or opportunity • Identify alternatives • Determine their costs and benefits • Evaluate and select the best alternative

18. CBA and the “Cost Culture” CBA is part of a high-priority initiative to inculcate a cost culture throughout the Army. • In any organization, “culture” is the beliefs and principles that guide the behavior of the people in that organization. • For example: The Army’s military culture is based on mission accomplishment, selfless service, valor, and dedication. These concepts establish the foundation for how Soldiers and Civilians go about their duties. • In a cost culture: • Cost is an integral part of every decision • Soldiers and Civilians strive to find better and cost effective ways to operate the Army enterprise • Leaders at all levels engage in cost control and management activities, which are supported by talented cost staffs

19. VALUE OF CBA

20. Why Do We Need CBAs? 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

21. REQUIREMENT FOR HQDA-LEVEL REVIEW

22. CBAs Requiring HQDA Review • Unfunded requirements, new program proposals, or expansions being presented to the Senior Leaders of the Department of the Army. • Issues presented to HQDA forums/processes: • Issues that are important to the Army leadership, OSD, or Congress • 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

23. CBARB • The Cost-Benefit Analysis Review Board, or CBARB, reviews each CBA submitted to HQDA and makes a recommendation to the Deputy Assistant Secretary of the Army (Cost and Economics) as to whether the CBA is suitable to support decision making.

24. CBA-RB Role for CBAs Submitted to HQDA • CBA-RB reviews CBA: • Cost estimate • Analytical rigor • Assumptions • 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 CBA is submitted CBA-RB reviews CBA and makes recommendation DASA-CE approves CBA Decision Maker uses CBA to make resource-informed decision • CBA-RB members: • Board chair - Division Chief • Standing members: • Army Budget Office (ABO) • PAED • G-3/5/7 • Other members, as needed based on the subject matter: • 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

25. Questions for Reviewers 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? • 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?

26. METHODOLOGY OVERVIEW

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

28. Eight-Step Methodology

29. Cost Benefit Analysis and the MDMP Military Decision-Making Process (MDMP) * CBA Methodology * As prescribed in FM 5-0.

30. CBA is Not a Linear Process Objective Recommendation Assumptions Sensitivity Analysis Alternatives Compare Alternatives Cost Estimates Benefits Estimate Selection Criteria • 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.

31. Step 1: Define the Problem/Opportunity and Objective Before beginning, determine whether the proposal is realistic and will be seriously considered. • The Problem Statement clearly defines the problem/opportunity that: • Requires a solution • Describes what the effort will accomplish • The objective of the analysis: • Describes the role of the CBA: what is the decision to be made, and how does the CBA inform and support it.

32. Step 2: Define CBA Boundaries and Parameters 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 condition or situation over which we have no control but is essential to the success of our proposed solution.

33. Step 3: Define Alternatives • Alternatives: • Potential solutions to the Problem Statement, given Scope, Facts, Assumptions, and Constraints. • They must include the status quo or current state, if applicable.

34. Step 4: Develop Cost Estimate for Each Alternative Cost Estimates: • Capture the total cost of each alternative over the appropriate period of analysis. Types of Cost Estimates: • Historical • Parametric • Analogy • Engineering Document the cost estimate with data sources, computations, rationale, etc. as this is essential to the review/validation process.

35. Step 5: Identify Quantifiable andNon-Quantifiable Benefits • Benefits: “Benefits of a chosen alternative are results expected in return for costs incurred. They are the quantitative and qualitative results expected or resulting from the implementation of a project/initiative (which may include but are not limited to the following: equipment, facilities, hardware, systems, etc.).” (CBA guide, “Step 5”)

36. Step 6: Define Alternative Selection Criteria Alternative Selection Criteria: • The standards upon which the decision will be based • Criteria must be consistent with the Problem Statement and the benefits CBAs must: • Identify the recommended decision criteria • Elucidate how much each alternative satisfies the criteria Leadership Engagement: The Lead Analyst should work with the Functional Manager to ensure they agree on the selection criteria, particularly if criteria will be weighted in the evaluation phase

37. Step 7: Compare Alternatives Alternative Comparison: Compare alternatives using the selection criteria to identify the preferred alternative. Billpayer Analysis: Identify the billpayer if there is a bill associated with the recommended alternative. Effects Analysis: Identify the positive and negative impacts of the 2nd and 3rd order effects. What must be done to manage the negative impacts? Sensitivity Analysis: Determine the robustness of the conclusions. If anything changes (i.e., assumptions, costs, benefits) would the recommendation change? Risk Analysis: Identify the high-risk aspects of the recommended alternative and define appropriate risk mitigation measures.

38. Step 8: Report Results and Recommendations Results and Recommendations: • Summarize the analysis • Make conclusive statements about each of the alternatives and how they were evaluated • Present specific recommended solution • Include documentation used in all steps

39. Packaging the Complete Product Preferred document format is a narrative. • Narrative provides all the words that would accompany a briefing and therefore is more clearly understood • Cost estimates are easier to document by including spreadsheets Key elements for both formats: • Clarity: • Does not contain vague, unsubstantiated statements/data • Presented in suitable terms for the intended recipient • Analytical rigor: • Steps are supported by and consistent with the preceding steps • Completeness: • Key deliverables are addressed at each step of the methodology CBA examples of narrative and briefing forms are in “Appendix E,” CBA Guide, https://cpp.army.mil

40. CBA is Not Rocket Science At the conclusion of this class, if you continue to follow the methodology we teach, you’ll find that a CBA is

41. IMPORTANT: CBA Guide • Establishes the standard procedure for preparation of CBAs, located at https://cpp.army.mil under “Documents” tab. • 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.

42. CBA and Army Decision Making CBAs: Are becoming embedded in the Army’s decision-making processes Are based on a sound, logical approach to problem solving Value of CBAs: Supplement (but not replace) professional experience, subject matter expertise, and military judgment Ensure the efficient allocation of the Army’s limited funds by enabling leaders to make better cost-informed decisions

43. Expectations and Tips What senior leaders expect: Support of the Army’s strategic priorities, directives, and regulations Analytical rigor and innovative thinking Collaboration with stakeholders to develop effective and efficient solutions Feasible alternatives • To plan for success in your CBA role: • Form a capable CBA team with clear roles and responsibilities • Understand the CBA eight-step methodology and the key deliverables • Establish a timeline to monitor progress • Leverage available support(identified in the “Resources” section of this briefing)

44. resources

45. Available Tools and Models for Cost Data Some of the websites listed here require user accounts. In most cases, anyone with a dot mil address can obtain an account. You are encouraged to scan these sites and request an account to any site that you think will be useful to you. This will save time when you need to use any sites to support a CBA or other projects. Access links through the “Resources” tab in the CBA Portal at https://cpp.army.mil

46. References and Assistance • Cost-Benefit Analysis Portal • Go to the Cost & Performance Portal (CPP) at https://cpp.army.mil • If you already have a CPP account, click Enter Site. If not, click Request a New Account and follow the instructions to register your Common Access Card (CAC). • If you get the message, There is a problem with this website’s security certificate, click on Continue to this Website. • On the next screen, in the upper-left corner • For the CBA Guide, examples, and related tools, click on Cost Benefit Analysis (CBA) Portal. • To submit or track the status of CBAs, click on CBA Workflow Tool. • Dedicated mailbox provides authoritative answers to all questions: • NIPR: usarmy.pentagon.hqda-asa-fm.mbx.army-cost-benefit-analy@mail.mil • SIPR: CBA@hqda-s.army.smil.mil

47. Before Beginning a CBA • Pre-CBA Considerations: • Ensure that a CBA is needed • Select a qualified CBA team • Ensure that the relevant decision-making forum is aware of the CBA review, so that the work of the CBA and review is a “value-added” process.

48. Pre-CBA Considerations - Need for CBA • A CBA is appropriate whenever decision-makers can be aided by an objective and resource-informed analysis of problems and alternatives. • When a CBA is required: VCS/USA Memo, 30 Dec 2009—“…each unfunded requirement and new or expanded program proposal submitted to the Secretary of the Army, Chief of Staff, Army, Under Secretary of the Army or Vice Chief of Staff, Army, [must] be accompanied by a thorough cost-benefit analysis (CBA).”

49. Pre-CBA Considerations - CBA Team Identification Validate the need for a CBA CBA Team • CBA is a team effort, not an individual effort • CBA Lead Analyst: Integrates efforts of CBA team • CBA Functional Proponents and Representatives: Provide data, assist in COA development, determine cost elements, validate/provide assumptions and constraints • CBA team members should: • Attend CBA training or orientation