1. 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 8. Report Results and Recommendations 7. Compare Alternatives 6. Define Alternative Selection Criteria 5. Identify Quantifiable and Non- Quantifiable Benefits 4. Develop Cost Estimate for each Alternative 3. Define Alternatives 2. Define the Scope; Formulate Facts and Assumptions 1. Define the Problem/Opportunity

2. 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 2 UNCLASSIFIED CBA Training Slides CBA is Value Analysis

3. Aid for Completing Step 7a 3 UNCLASSIFIED CBA Training Slides CostsBenefitsSelection Criteria Equal Unequal Alternative that provides greatest benefits for given cost EqualSubjective reasoning and a fortiori analysis Unequal Alternatives ranked in order (based on benefit/cost ratio, net present value, or other relevant criterion) EqualLeast costly alternative

4. 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 4 UNCLASSIFIED CBA Training Slides

5. Common Mistakes  Assuming away the problem  Assuming away cost  “Over-averaging” for sake of simplification  Show examples of each (or at least last one) 5 UNCLASSIFIED CBA Training Slides

6. Simple Case Cost ($M)Benefit Status Quo30Good Added capability45Very Good Decreased capability55Excellent 6 UNCLASSIFIED CBA Training Slides Which COA is the best value?

7. Data Analysis 7 UNCLASSIFIED CBA Training Slides CostsBenefits 30150 45225 55275 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.

8. Optimization 8 UNCLASSIFIED CBA Training Slides CostsBenefits 30150 45225 55275 CostsBenefits 30150 40160 45225 50265 55275 Fairly linear relationship Decreasing bang for buck Increasing bang for buck Which COA is the best value?

9. Optimization example  Find the “knee in the curve”  Simple linear example  use simplex  Teach solver  Efficient frontier? – or complex example 9 UNCLASSIFIED CBA Training Slides

10. 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 10 UNCLASSIFIED CBA Training Slides

11. (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 11 UNCLASSIFIED CBA Training Slides

12. 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 12 UNCLASSIFIED CBA Training Slides

13. Example  Which costs more?  Present costs in base year.  Present costs in present value or NPV. 13 UNCLASSIFIED CBA Training Slides Current/Then year $MM 2000200120022003200420052006TOTAL COA 1(85)(21) (22)(23) (24)(218) COA 2(150)(10)(11) (12) (217) Inflation3% Discount Rate5%

14. PV Example  Which costs more? 14 UNCLASSIFIED CBA Training Slides Current/Then year $MM 2000200120022003200420052006TOTAL COA 1(85)(21) (22)(23) (24)(218) COA 2(150)(10)(11) (12) (217) 2000200120022003200420052006TOTAL COA 1(85)(20) (205) COA 2(150)(10) (210) Constant/Base year $MM 2000200120022003200420052006TOTAL COA 1(85)(20)(19) (18) (197) COA 2(150)(10) (9) (206) PV $MM discounted at 5% rate

15. PV Example  Relative costs  Compare annual savings  Discounts at cost of capital 15 UNCLASSIFIED CBA Training Slides Current/Then year $MM NPV $MM discounted at 5% rate 2000200120022003200420052006TOTAL COA 1(85)000000 COA 2(150)1011 12 (83) 2000200120022003200420052006TOTAL COA 1(85)000000 COA 2(150)10 9999(94)

16. 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 16 UNCLASSIFIED CBA Training Slides

17. BCR Examples  Simplified example with dollars  Operational example  Utility/dollar  Dollars/kill 17 UNCLASSIFIED CBA Training Slides

18. Decision Matrix  Tool compares benefits and costs to produce a single value score  Army staff officers taught to include in decision briefs 18 UNCLASSIFIED CBA Training Slides

19. 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 19 UNCLASSIFIED CBA Training Slides

20. 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 20 UNCLASSIFIED CBA Training Slides

21. Example  Benefits:  Increased transaction rate  Better working area  Faster email processing  Less administrative burden  How do you present the value? 21 UNCLASSIFIED CBA Training Slides Investment Costs Transaction RatesEmail Speed Administrative Load Status Quo30150 Decent ~ 30 min delay/week- COA 145225 Better ~10 min delay Save 300 hours/year COA 255275 Much Better ~5 min delay Save 1000 hours/year

22. “Cost Free” Analysis  Alternatives present savings against the status quo or baseline case  Or the analysis costs are non-monetary 22 UNCLASSIFIED CBA Training Slides

23. “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. 23 UNCLASSIFIED CBA Training Slides

24. “Free” Example CostsBenefits 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 24 UNCLASSIFIED CBA Training Slides

25. Double Counting of Criteria 25 UNCLASSIFIED CBA Training Slides COA1-SQ COA2-CIV COA3-MIL Cost Costs$0.06.0$5.02.0$5.02.0 Benefit ARFORGENNA2.0GOOD3.0BAD1.0 New mission benefit01.0+10%3.0+10%3.0 9.08.06.0 COA1-SQ COA2-CIV COA3-MIL Cost Costs$0.06.0$5.04.0$10.02.0 Benefit ARFORGENNA2.0GOOD3.0BAD1.0 New mission benefit01.0+10%3.0+10%3.0 9.010.06.0 Impact of using personnel is counted both as a cost and a contra-benefit

26. 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. 26 UNCLASSIFIED CBA Training Slides

27. 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 2 nd or 3 rd order effect (e.g. policy change).  The scope or domain often limit the # of next order effects. 27 UNCLASSIFIED CBA Training Slides

28. 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 28 UNCLASSIFIED CBA Training Slides

29. 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 29 UNCLASSIFIED CBA Training Slides

30. Example  Variations in assumptions that change cost and benefits  @risk or crystal ball run  Change costs  change benefits  Change decmat weights 30 UNCLASSIFIED CBA Training Slides

31. 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? 31 UNCLASSIFIED CBA Training Slides

32. 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. 32 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 8. Report Results and Recommendations 7. Compare Alternatives 6. Define Alternative Selection Criteria 5. Identify Quantifiable and Non- Quantifiable Benefits 4. Develop Cost Estimate for each Alternative 3. Define Alternatives 2. Define the Scope; Formulate Facts and Assumptions 1. Define the Problem/Opportunity

33. 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. 33 UNCLASSIFIED CBA Training Slides 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.