Presentation on theme: "Affordability Analysis: The Role Process, Cost and ROI Modeling In Improved Program Performance SEI October 2012 Galorath Incorporated Daniel."— Presentation transcript:
Affordability Analysis: The Role Process, Cost and ROI Modeling In Improved Program Performance SEI October 2012 Galorath Incorporated Daniel D. Galorath: Founder & CEO Copyright Galorath Incorporated 2012
Cost Overruns Are Everywhere “GAO: Staggering cost overruns dwarf modest improvements in Defense acquisition” R&D costs of weapons programs increased 42% over original estimates Average delay 22 months in delivering initial capabilities Evolving technical requirements Shortage of qualified government staff to manage "Every dollar of cost growth on a DoD weapon system represents a lost opportunity to pay for another national priority" “The Collins Class submarine program: Murphy was an optimist” “BG Group shares hit by $5.4B cost overruns on Australian Liquified Natural Gas project”
Software Is A Key Risk Item In Weapons Systems Navy Mobile User Objective Satellite Communication System delays to the Joint Tactical Radio System, a set of software-defined radios causes advanced MUOS capabilities to be drastically underused… GAO GAO identified 42 programs at risk for cost & schedule 1.military requirements changes 2.software development challenges 3.workforce issues National Institute of Standards and Technology (NIST) Software defects cost nearly $60 Billion Annually 80% of development costs involve identifying and correcting defects Software, not Hardware or technology readiness levels were called out
Example: Project Cost Alone Is not The Cost of IT Failure (Source: HBR) Case Study: Levi Strauss $5M ERP deployment contracted Risks seemed small Difficulty interfacing with customer’s systems Had to shut down production Unable to fill orders for 3 weeks $192.5M charge against earnings on a $5M IT project failure “IT projects touch so many aspects of organization they pose a new singular risk”
An ROI Analysis of A New System: Should We Fund This? Can we do better? Will stakeholders tolerate a loss for 3 years? What is the risk?
June 28, 2010 Mandate September 14, 2010 Guidance November 3, 2010 Implementation Five Specific Areas of Concern: Target Affordability and Control Cost Growth Reduce Non-Productive Processes and Bureaucracy Incentivize Productivity and Innovation in Industry Promote Real Competition Improve Tradecraft in Services Acquisition US Better Buying Power Initiatives
System Description (Parametrics Can Estimate More, Earlier) Adapted from CEBOK “If you can’t tell me what it is, I can’t tell you what it costs.” -Mike Jeffers “If you can tell me the range of what it might be, I can tell you the range of cost, schedule & probability.” -Dan Galorath
Affordability Process Step 1. Procure Key Performance Parameters that are inviolate Step 2. Identify Affordability Goals & Figures of Merit (development, life cycle, payback, ROI, NPV, kill ratio, Budget constraints, etc.) Step 3. Gather Requirements, Features, Performance Step 4. Define Baseline Alternatives Step 5. Perform Technical Design Analysis for Each Alternative Step 6. Perform Cost Schedule Analysis of Each Alternative Step 7. Assess Benefits Based on Figures of Merit Step 8. Perform Probabilistic Risk Analysis Step 9. Assess Alternatives & Select Optimal Alternative Step 10. Document Analysis and Lessons Learned
Complex Parametric Modeling: Repeatable Based on Program Parametric Estimating Mathematical relationships between anticipated characteristics and effort, schedule, risk, etc. & Technology, programmatics, cost, schedule, To estimate Development Production Effort / cost / Total Cost of Ownership Schedule Manufacture Modification Deployment of end items Much more Part of a repeatable process Traditional Estimating Many techniques from: Guessing Simple Analogy Spreadsheets Bottoms up Quantity x price Etc. Generally manual in nature… Most are not repeatable
18 What is likely to happen Feel lucky? Firm Fixed Price? Understand the risk before you commit!