Technical Report: Value of Flexibility; Phase I

Report Number: Technical Report SERC-2010-TR-010-1

Report Name: Value of Flexibility – Phase I

Publication Date:  September 25,2016

This report provides findings from the research conducted under RT-18: Valuing Flexibility project during the first seven month period. The primary goal of this research project is to identify, develop and validate sound quantitative methods, processes, and tools that will enable DoD leadership and program managers to make a convincing case for investments in system flexibility when acquisition decisions are made.

The research during this period focused on identifying current quantitative MPTs for valuing flexibility in DoD context, and delivering an initial capability to value investments that provide the flexibility to handle foreseeable sources of change, using easy-to-understand monetizable terms, such as the effect of the investments on total cost of ownership or return on investment. We conducted a critical evaluation of the theoretical foundations underlying current approaches, the dimensions of flexibility, measures of flexibility, value functions, and methods for incorporating flexibility – both at the design phase and the operational phase, to identify strengths and weaknesses of each approach. During this period, we also explored the development of an analytical framework based on sound mathematical constructs.

A review of the current state-of-the-art showed that there is little unifying theory or guidance on best approaches to measure flexibility, quantify value of flexibility in a prospective systems acquisition or which MPTs work best in which situations. In fact, the analytical basis for defining and valuing flexibility is missing. Considering this major gap in the current state-of-the-art the primary focus of our research activities is in developing a coherent value based definition of flexibility that is based on an analytical framework that is mathematically consistent, domain independent and applicable under varying information levels. This report presents our advances in defining and formalizing the value of flexibility and the underlying capability-need-value architecture that could form the basis for developing tools that can be used by systems acquisition decision-makers to conduct tradeoff analysis between flexibility and other system performance measures of interest.