1. 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

2. 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-096-06 2

3. 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-096-06 3 The greatest opportunity to reduce life cycle costs usually occurs during the early stages of a programme

4. 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-096-06 4

5. Costing Process June 5, 2012 M.C. Smit MP-SAS-096-06 5

6. 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-096-06 6

7. 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 1.3.5.1computer equipment for training devices 1.3.5.2cost of software 1.3.5.3cost of secure network 1.3.6construction costs 1.3.6.1cost to build new infrastructure 1.3.6.2cost to adapt infrastructure 1.3.7preparation costs 1.3.7.1costs of test and acceptance 1.3.7.2project costs 1.3.7.3costs pack/store/handle & transportation 1.3.8other investment costs June 5, 2012 M.C. Smit MP-SAS-096-06 7 2operating and support costs 2.1 operating costs 2.1.1cost of instructors 2.1.2cost of using training devices 2.1.3 cost of refreshment training instructors 2.1.4cost of updating courseware 2.1.5 cost of updates operating documentation 2.1.6 operating costs new and adapted infrastructure 2.1.7 cost of consumables (fuel, electricity) 2.1.8 travel expenses students/personnel 2.1.9 accommodation costs students/personnel 2.2 support costs 2.2.1cost of support personnel 2.2.1.1cost of maintenance personnel 2.2.1.2cost of technical personnel 2.2.2cost of refreshment training support personnel 2.2.3cost use of spare parts 2.2.4 cost use of support equipment 2.2.5cost of updates maintenance documentation 2.2.6cost use of computers and software 2.2.6.1cost replacements computers 2.2.6.2cost software licences 2.2.6.3cost of subscription courseware 2.2.7 cost of data security 2.2.8cost of outsourcing technical support 2.2.9cost of outsourcing maintenance 2.2.10 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

8. M.C. Smit MP-SAS-096-06 8 Estimating methods June 5, 2012

9. 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-096-06 9

10. Summary Framework June 5, 2012 M.C. Smit MP-SAS-096-06 10

11. Cost Benefit Analysis (CBA) June 5, 2012 M.C. Smit MP-SAS-096-06 11 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

12. 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-096-06 12

13. Economic Evaluation of Alternatives June 5, 2012 M.C. Smit MP-SAS-096-06 13 Source: Prof. Dr. Francois Melese, Naval Post Graduate School

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15. More information ? TNO Behavioural and Societal Sciences Strategic Business Analysis M.C. (Marcel) Smit, M.Sc. Brassersplein 2 2612 CT Delft The Netherlands Phone: +31 88 866 39 09 Mobile: +31 6 211 343 54 Email: marcel.smit@tno.nl June 5, 2012 M.C. Smit MP-SAS-096-06 15