Conference Paper: Valuing System Flexibility via Total Ownership Cost Analysis

Title: Valuing System Flexibility via Total Ownership Cost Analysis

Publication Date: 10/15/2010

Conference: NDIA 13th Annual Systems Engineering Conference, San Diego, CA, October 2010

A significant current challenge in defense acquisition is to provide a rationale for devoting portions of an acquisition budget to investments in system flexibility to adapt to future threats or opportunities, vs. investing in more units of fielded capability. To be convincing, such a rationale needs to be backed by relevant quantitative data and analysis, easy to understand and explain, able to perform sensitivity and tradeoff analyses, and based on information generally available early.

Several candidate methods for valuing flexibility exist, such as real options analysis, insurance analysis, portfolio analysis, entropy measures, total ownership cost analysis, and cost-of-delay analysis. Each has advantages in certain situations; based on our experience in developing and applying cost estimation models in numerous defense acquisition situations, we have found that total cost of ownership analysis is relatively easy to understand and explain, and a good way to start toward applying some of the more sophisticated approaches.

This presentation will summarize two approaches to valuing system flexibility via total ownership cost analysis. One involves calculating the total cost of ownership for various levels of investment in analysis of the commonalities and variabilities across a product line of similar systems, and building in flexibility to enable reuse or easy adaptation of common components, and plug-compatible interfaces for the variable components. For software systems, it is based on a database of 161 projects, across which the level of the investments and resulting cost savings have been determined. The other involves modeling and simulation of life cycle total ownership cost based on cost-of-change data categories from three defense projects, one which was architected for flexibility and had low costs of change, and two which did not.