© HVR Consulting Services Ltd HVR CONSULTING SERVICES LIMITED DISCOUNTING EFFECTIVENESS A DEMONSTRATION by D. Daniel & D. Faddy A paper for the 20 th International Symposium on Military Operational Research

© HVR Consulting Services Ltd Background At ISMOR 18 we presented a methodology for discounting effectiveness in cost-effectiveness studies. At ISMOR 18 we presented a methodology for discounting effectiveness in cost-effectiveness studies. We proposed that effectiveness should be discounted for obsolescence. This is not measurable directly but is closely correlated to historic cost escalation. We proposed that effectiveness should be discounted for obsolescence. This is not measurable directly but is closely correlated to historic cost escalation.

© HVR Consulting Services Ltd Factors taken into account in our proposed methodology Gradual transition from old capability to new as new systems are introduced. Gradual transition from old capability to new as new systems are introduced. Alternative procurement options may have quite different entry into service dates. Alternative procurement options may have quite different entry into service dates. Although performance may stay constant over a systems lifetime, capability against advancing threat technology declines. Although performance may stay constant over a systems lifetime, capability against advancing threat technology declines.

© HVR Consulting Services Ltd The Case Study Various options replace a portfolio of legacy equipments. Various options replace a portfolio of legacy equipments. Original study derived comparative effectiveness measures by simulation for all transitional mixes. Original study derived comparative effectiveness measures by simulation for all transitional mixes.

© HVR Consulting Services Ltd Real Life Complexity Some Options were mixes of systems. Some Options were mixes of systems. New systems had very different earliest entry into service dates. New systems had very different earliest entry into service dates. Study spanned 30 years. Study spanned 30 years.

© HVR Consulting Services Ltd Option 1 - Replace by 1 System

© HVR Consulting Services Ltd Option 2 – Replace by 2 Systems

© HVR Consulting Services Ltd Initial Demonstration Simplified Model, given effectiveness measures for transitional years Simplified Model, given effectiveness measures for transitional years M dj = M j (1-t) j-k Where: M dj = the discounted effectiveness at year “j”,j= 0 (1) 29 M j = effectiveness at year “j” t = discount factor for obsolescence t = discount factor for obsolescence k = datum year in which the assessment scenario takes place. k = datum year in which the assessment scenario takes place.

© HVR Consulting Services Ltd Examples of Military equipment Cost Escalation -2.5% to +2.5%essentially zero escalation, e.g. rifle, SSK +2.5% to +7.5%moderate escalation, e.g. APC, MBT +7.5% to +12.5% typical escalation, e.g. tactical transport a/c, SSN More than +12.5%exceptional escalation, e.g. fighter aircraft, attack helicopters

© HVR Consulting Services Ltd Rates used in Trial 7.5% used for all legacy systems and one replacement system 12.5% used for “advanced and later” replacement system

© HVR Consulting Services Ltd Choice of datum year Scenarios for original study were set in year 14. Scenarios for original study were set in year 14. Threat is assumed to increase with the pace of technology Threat is assumed to increase with the pace of technology Hence legacy equipment in earlier years will be more effective than measured in the scenario year. Hence legacy equipment in earlier years will be more effective than measured in the scenario year.

© HVR Consulting Services Ltd Undiscounted effectiveness

© HVR Consulting Services Ltd Discounted results

© HVR Consulting Services Ltd Option buys 15 years advantage

© HVR Consulting Services Ltd Consequences of Discounting Discounting not going to change ranking order of options in this case. Discounting not going to change ranking order of options in this case. In sensitivity tests the most cost effective option was less sensitive to change. In sensitivity tests the most cost effective option was less sensitive to change.

© HVR Consulting Services Ltd Single Super Power Dominance May subdue arms race. May subdue arms race. Need to question relevance of discounting for obsolescence that may have temporarily disappeared. Need to question relevance of discounting for obsolescence that may have temporarily disappeared.

© HVR Consulting Services Ltd General lessons from History Whenever arms race restarts it does so: Whenever arms race restarts it does so:either With emergence of novel threat, accelerating obsolescence. With emergence of novel threat, accelerating obsolescence.or With aggressive catching up period which re-establishes the long term trend. With aggressive catching up period which re-establishes the long term trend.

© HVR Consulting Services Ltd Demonstrating more Comprehensive Model M total = M st + M ct Where: M st = M s (n st /N s ) & M ct = M c (n ct /N c ) and n st is number of new systems in service in year “t” N s is number of new systems in final fleet n ct is number of current systems at year “t” N c is number of systems in the current fleet

© HVR Consulting Services Ltd More complex example - undiscounted effectiveness

© HVR Consulting Services Ltd More complex example - discounted

© HVR Consulting Services Ltd Conclusions Only tentative, based on one test. Only tentative, based on one test. Can give insight into need for mid-life updates. Can give insight into need for mid-life updates. Gives different view on sensitivity test. Gives different view on sensitivity test. Opportunity to provide whole life effectiveness profile very simply. Opportunity to provide whole life effectiveness profile very simply.