Step 7: Comparison of Alternatives 7a.Compare COAs using alternative selection criteria to identify the preferred COA. 7b.If there is a bill associated

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.

1 CBA Training Slides

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

2UNCLASSIFIED CBA Training Slides

CBA is Value Analysis

Aid for Completing Step 7a


Costs Benefits Selection Criteria

EqualUnequal Alternative that provides greatest benefits for

given cost

Equal Subjective reasoning and a fortiori analysis

UnequalUnequal

Alternatives ranked in order (based on benefit/cost ratio, net present value, or other relevant criterion)

Equal Least costly alternative

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


Common Mistakes

Assuming away the problem Assuming away cost “Over-averaging” for sake of simplification

Show examples of each (or at least last one)


Simple Case

Cost ($M) Benefit

Status Quo 30 Good

Added capability 45 Very Good

Decreased capability 55 Excellent


Which COA is the best value?

Data Analysis


Costs Benefits

30 150

45 225

55 275

• 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.

Optimization


Costs Benefits30 15045 22555 275

Costs Benefits30 15040 16045 22550 26555 275

Fairly linear relationship

Decreasing bang for buck

Increasing bang for buck

Which COA is the best value?

Optimization example

Find the “knee in the curve” Simple linear example

use simplex Teach solver

Efficient frontier? – or complex example


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


(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


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


Example

Which costs more? Present costs in base year. Present costs in present value or NPV.


Current/Then year $MM

2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) (21) (21) (22) (23) (23) (24) (218)COA 2 (150) (10) (11) (11) (11) (12) (12) (217)

Inflation 3%Discount Rate 5%

PV Example

Which costs more?



2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) (21) (21) (22) (23) (23) (24) (218)COA 2 (150) (10) (11) (11) (11) (12) (12) (217)

2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) (20) (20) (20) (20) (20) (20) (205)COA 2 (150) (10) (10) (10) (10) (10) (10) (210)

Constant/Base year $MM

2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) (20) (19) (19) (19) (18) (18) (197)COA 2 (150) (10) (10) (9) (9) (9) (9) (206)

PV $MM discounted at 5% rate

PV Example

Relative costs Compare annual savings Discounts at cost of capital



NPV $MM discounted at 5% rate

2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) 0 0 0 0 0 0 (85)COA 2 (150) 10 11 11 11 12 12 (83)

2000 2001 2002 2003 2004 2005 2006 TOTALCOA 1 (85) 0 0 0 0 0 0 (85)COA 2 (150) 10 10 9 9 9 9 (94)

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


BCR Examples

Simplified example with dollars Operational example

Utility/dollar Dollars/kill


Decision Matrix

Tool compares benefits and costs to produce a single value score

Army staff officers taught to include in decision briefs


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


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


Example

Benefits: Increased transaction rate Better working area Faster email processing Less administrative burden

How do you present the value?


InvestmentCosts

Transaction Rates Email Speed

Administrative Load

Status Quo 30 150Decent ~ 30 min

delay/week -

COA 1 45 225Better ~10 min

delaySave 300 hours/year

COA 2 55 275Much Better ~5

min delaySave 1000 hours/year

“Cost Free” Analysis

Alternatives present savings against the status quo or baseline case

Or the analysis costs are non-monetary


“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.


“Free” Example

Costs Benefits

Status Quo – Baseline

COA 1 •With loss of office, AMC will not be able to meet requirements X &Y.•Lease costs near Pentagon•Transfer of personnel & equipment•Locality differences

•Reqts VI-X.•Cost of 7 personnel•Huntsville facility savings

COA 2 •TACOM will no longer be able to meet requirements A, B & C.•Lease costs near Pentagon•Transfer of personnel & equipment•Locality differences

•Reqts VI-X.•TACOM facility savings


Double Counting of Criteria


COA1-SQ COA2-CIV COA3-MIL

Cost Costs $0.0 6.0 $5.0 2.0 $5.0 2.0

BenefitARFORGEN NA 2.0 GOOD 3.0 BAD 1.0

New mission benefit 0 1.0 +10% 3.0 +10% 3.0

9.0 8.0 6.0

COA1-SQ COA2-CIV COA3-MIL

Cost Costs $0.0 6.0 $5.0 4.0 $10.0 2.0

BenefitARFORGEN NA 2.0 GOOD 3.0 BAD 1.0

New mission benefit 0 1.0 +10% 3.0 +10% 3.0

9.0 10.0 6.0

Impact of using personnel is counted both as a cost and a contra-benefit

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.


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.


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


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


Example

Variations in assumptions that change cost and benefits

@risk or crystal ball run Change costs change benefits Change decmat weights


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?


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.

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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?

CBA Training Slides

Practice Step 8

We will discuss Step 8 by reviewing a notional CBA decision briefing for the APS practical exercise

Note: 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.

Documents

Step 7: Comparison of Alternatives 7a.Compare COAs using alternative selection criteria to identify the preferred COA. 7b.If there is a bill associated