Cost Analysis of Military Training Marcel C. Smit SAS-095 workshop on Cost-Benefit Analysis of Military Training Amsterdam, The Netherlands 5-6 June 2012

Outline Cost Analysis Applications of Cost Analysis Costing process Framework of Cost Analysis Cost Breakdown Structure Methods Uncertainty & Risk Cost Effectiveness, Cost Benefit analysis Economic Evaluation of Alternatives June 5, 2012 M.C. Smit MP-SAS

Cost analysis Investment decisions are supported by weighing costs against benefits. A life cycle cost estimate, if done properly, is the single best metric for measuring the value for money of defence resources. Cost analysis can be done in each phase of the life cycle. Insight in not only acquisition, but also O&S costs Not an exact science: does not provide exact figure Merely gives an insight into the major factors of influence Highlights the magnitude of the costs Identifies areas for potential cost savings June 5, 2012 M.C. Smit MP-SAS The greatest opportunity to reduce life cycle costs usually occurs during the early stages of a programme

Application of Cost Analysis Evaluating and comparing alternative solutions Assessing the affordability Managing the budgets Developing future expenditure profiles Evaluating cost reduction opportunities Evaluating area of financial risk and uncertainty Benefits for stakeholders Better insight in all costs Identifying key cost drivers Assist the decision making process Methodical and consistent estimating approach June 5, 2012 M.C. Smit MP-SAS

Costing Process June 5, 2012 M.C. Smit MP-SAS

Framework Cost Analysis Objective Requirements Identification of constraints Assumptions Cost Breakdown Structure Data Methods Models Uncertainty & Risk Reporting & Presentation June 5, 2012 M.C. Smit MP-SAS

Cost Breakdown Structure for Military Training 1 initial investment 1.1acquisition cost training devices 1.2development cost course ware 1.3acquisition cost initial logistics support 1.3.1costs initial spare parts package 1.3.2costs initial support equipment 1.3.3cost of training instructors 1.3.4costs initial documentation 1.3.5costs computer equipment computer equipment for training devices cost of software cost of secure network 1.3.6construction costs cost to build new infrastructure cost to adapt infrastructure 1.3.7preparation costs costs of test and acceptance project costs costs pack/store/handle & transportation 1.3.8other investment costs June 5, 2012 M.C. Smit MP-SAS operating and support costs 2.1 operating costs 2.1.1cost of instructors 2.1.2cost of using training devices cost of refreshment training instructors 2.1.4cost of updating courseware cost of updates operating documentation operating costs new and adapted infrastructure cost of consumables (fuel, electricity) travel expenses students/personnel accommodation costs students/personnel 2.2 support costs 2.2.1cost of support personnel cost of maintenance personnel cost of technical personnel 2.2.2cost of refreshment training support personnel 2.2.3cost use of spare parts cost use of support equipment 2.2.5cost of updates maintenance documentation 2.2.6cost use of computers and software cost replacements computers cost software licences cost of subscription courseware cost of data security 2.2.8cost of outsourcing technical support 2.2.9cost of outsourcing maintenance costs to upgrade training devices 3 decommissioning costs 3.1cost of decommissioning training devices 3.2cost of decommissioning support elements 3.3cost of decommissioning infrastructure

M.C. Smit MP-SAS Estimating methods June 5, 2012

Uncertainty and Risk Requirement to identify uncertainty in results cost analysis: Estimates are uncertain! Uncertainty about the future No or missing data or information Unclear data or information Doubts about the accuracy of data or information Determine bandwidths for parameters with uncertain values Apply Monte Carlo Simlulation to determine probability distribution June 5, 2012 M.C. Smit MP-SAS

Summary Framework June 5, 2012 M.C. Smit MP-SAS

Cost Benefit Analysis (CBA) June 5, 2012 M.C. Smit MP-SAS Cost–benefit analysis (CBA), is a systematic process for calculating and comparing benefits and costs of a project. CBA has two purposes: To determine if it is a sound investment/decision (justification /feasibility ) To provide a basis for comparing projects. It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much. Cost–benefit analysis (CBA), is a systematic process for calculating and comparing benefits and costs of a project. CBA has two purposes: To determine if it is a sound investment/decision (justification /feasibility ) To provide a basis for comparing projects. It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much. However, the benefits can often not be expressed in monetary terms. Then Measures of Effectiveness (MoE) are developed and the CBA converts into a Cost Effectiveness Analysis (CEA). In a CEA the effectiveness and the total LCC are compared. Most common methodology for building MoEs and structuring a CEA is Multiple Criteria Decision Making (MCDM). However, the benefits can often not be expressed in monetary terms. Then Measures of Effectiveness (MoE) are developed and the CBA converts into a Cost Effectiveness Analysis (CEA). In a CEA the effectiveness and the total LCC are compared. Most common methodology for building MoEs and structuring a CEA is Multiple Criteria Decision Making (MCDM). Source: Wikipedia

Economic Evaluation of Alternatives Buyer sends out an economic RfP, with: All requirements and wishes to the system And… an affordability assessment: optimistic, pessimistic and most- likely budget (funding) for the overall programme Vendors submit their offer based on the different budget scenarios. Buyer can derive the response function. June 5, 2012 M.C. Smit MP-SAS

Economic Evaluation of Alternatives June 5, 2012 M.C. Smit MP-SAS Source: Prof. Dr. Francois Melese, Naval Post Graduate School

June 5, 2012 M.C. Smit MP-SAS

More information ? TNO Behavioural and Societal Sciences Strategic Business Analysis M.C. (Marcel) Smit, M.Sc. Brassersplein CT Delft The Netherlands Phone: Mobile: June 5, 2012 M.C. Smit MP-SAS