This is the second in a series of articles that discusses the most critical steps necessary for a successful program. We discussed last month the first critical task – the need to develop a complete set of high level performance requirements, frequently called a Mission Need Statement (MNS) or Critical Requirements Document (CRD) — as the initial step.
This article focuses on the second critical task — the development of a Business Case Analysis (BCA) for the project.
What is a BCA?
A BCA is a process used by many government agencies and commercial companies to select the optimum alternative to provide the program requirements/service that have been identified in the MNS or CRD. Government agencies and companies may use different names for this program acquisition step but the process is basically the same for every agency and company.
Performing a high quality BCA is frequently the most difficult task encountered during a program because the information and decisions from the BCA impact the program throughout its life cycle. The BCA determines the alternative, or solution, to be implemented by the program and it also establishes rough order of magnitude (ROM) estimates for the cost, schedule and benefits of the program — all of which the Program Manager must live with through the entirety of the program.
What information is required to perform a BCA?
The first step of a BCA process is to identify at least two, and preferably three, possible technical alternatives that can realistically achieve the desired technical performance/service required in the MNS or CRD. A key fundamental objective to consider for this first step is that no alternative should be considered which is not technically feasible. The different possible alternatives to be analyzed can and should be based on different criteria such as:
- The alternatives may be based on different technology;
- The alternatives may use current technology or require research and development;
- The alternatives may include either purchasing or leasing a system or purchasing or leasing a service; and
- The alternatives will likely each have different cost, schedule, performance, and benefit values.
The second step of a BCA process is the most difficult part of the process. This step includes estimating, with a reasonable degree of accuracy, the cost, schedule and benefits for each alternative being analyzed. The types of information that must be estimated for each alternative include:
- A high level work breakdown structure (WBS) must be developed for each alternative which identifies all major tasks required to design, develop, test, produce and install each alternative (if the alternative requires research and development). This task is somewhat simplified for alternatives that are available as commercial-off-the-shelf (COTS) systems or services or alternatives that do not require any research and development.
- Cost and schedule estimates must then be developed for each WBS task for each alternative.
- Projected benefits must then be estimated for each alternative using the performance requirements specified in the MNS/CRD and the estimated schedule for that alternative. Benefits should be based as much as possible on monetary values, but non-monetary benefits may also be identified for each alternative (e.g., political factors, international agreements, labor contract agreements, etc.).
- Risk factors must also be developed for the cost, schedule, and performance (technical) aspects of each alternative.
- A benefit to cost (B/C) ratio is then usually computed for each alternative using the total estimated benefits and costs for each alternative.
How is the decision made to determine the “optimum” solution?
Few BCAs have a clear cut “winner” or decision for which alternative should be selected to fulfill the MSN or CRD. This is because there are usually many more factors than cost involved in a BCA decision. Few BCA decisions can be solely based on the lowest cost. For example the least expensive solution may also have the lowest benefits (also known as return on investment) and may have more and/or different risks than the other more expensive solutions. Conversely, more expensive solutions may have much higher benefits, lower risks in some areas, and may have higher performance than the lowest cost alternative.
The “selection” phase of the BCA is accomplished by comparing the following five categories of information that have been developed for each alternative to determine the optimum or most feasible alternative to be implemented to accomplish the MNS/CRD requirements:
- Technical performance
- Benefits — monetary and non-monetary
- All risks, strengths, and weaknesses associated with the technical design, schedule, costs and projected benefits
All government agencies and companies do not use the same period of program duration to estimate their program costs and benefits. Many government agencies use the standard 20 year life cycle duration for the system/service while others may use 25 years or some other period of time. A 10 year life cycle is typically used for programs that are based on COTS or non-development technology. Unfortunately, there is no magic equation to determine the optimum alternative by plugging in the numbers for each of the above program estimates and factors. The decisions for most BCAs are complex and are based on a combination of quantitative and qualitative information at that time; the priorities and needs of the procuring agency; and current level of customer/user support when the BCA is performed (i.e., some customers or users may prefer one alternative more than the other alternatives based on their costs, projected equipage, and other factors).
Many agencies and companies use a B/C ratio of 1.0 as a significant factor in their decision as to whether or not a program should be approved. If the estimated benefits of a program do not equal or exceed the estimated costs for the program, then frequently the program is not approved unless it is required regardless of the “payback” of the program. An example of a program that may be approved with a B/C ratio of less than 1.0 would be an infrastructure system that is required to support other programs in the agency or company and where it is virtually impossible to prorate benefits from the other programs that require this program to provide their services (i.e., an IT network, a new power system, etc.).
Another possible finding of a BCA is that no alternative should be pursued if all of the alternatives have significant technical risks, excessive costs, insufficient benefits and other negative factors.
What are the challenges in performing a BCA?
There are many challenges in performing a high quality BCA which will accurately identify the five basic elements used to determine the optimum alternative. Examples of some of the types of challenges encountered when performing a BCA are:
- Identifying all of the major tasks involved in fielding each alternative.
- Estimating the time and cost for each of the major tasks for each alternative.
- Identifying and quantifying as much as possible the future benefits for a system or service that may not even be fielded for three to seven years after it is started. This is similar to using a crystal ball to project what the world will be over the next 10-25 years.
- Identifying all risks, major strengths, and weaknesses for the technical design, cost estimates and schedule estimates.
Who should prepare a BCA?
Many types of subject matter experts (SME) are typically required to prepare BCAs with a high degree of accuracy for large complex programs, including the following:
- Program managers ensure that all necessary work tasks, cost estimates and schedule estimates are properly developed which conform to acquisition regulations and requirements.
- Engineers identify technical alternatives, work tasks and prepare cost and schedule estimates.
- Logistics support experts ensure that all life cycle support requirements are properly identified and that cost and schedule estimates for each logistics element are properly developed.
- Business/financial support experts ensure the development of cost estimates, and provide guidance for budget and financial processes that must be followed.
- Benefits experts work with the operational SMEs and user community to ensure the benefits for each alternative are properly identified and estimated.
- Contract experts provide guidance on all contract types and regulations that must be followed.
- Operational experts ensure that the MSN/CRD performance and operational requirements are properly addressed for each alternative, and support the development of benefits for each alternative.
- External users or operators may be included as “advisors” for the identification of alternatives and the development of any user costs and the development of benefits for each alternative.
This brief article discussing the BCA process is only intended to provide a high level overview of the process used by many government agencies and companies to select the optimum alternative solution for a program.
We’ll post further discussions of the other critical tasks required for a successful program in this space. Meanwhile, contact North Star Group if you have questions concerning the development of program management documents.