Program Life Cycle Cost Driver Model (LCCDM) Daniel W. Miles, General Physics, June 28 Introduction Several years ago during the creation of the Periscope Total Ownership Cost (TOC) Program, it became very apparent that existing government processes and methods to assess TOC were not user-friendly. Documentation requirements were excessively detailed and difficult to use and, due to time constraints, most efforts were initially expended in interpreting these documentation requirements. Under these circumstances, it was very difficult to effectively provide a better understanding of the underlying program infrastructure costs and associated cost drivers that factor into the TOC process. The development by General Physics Corporation (GP) of the P5 Cost Driver Model (CDM) subsequently provided a much needed TOC management tool to organize program cost data in a more efficient manner. The model distinguishes all program TOC factors as belonging to one of five possible basic cost driver categories People, Paper, Parts, Performance, and Places. This classification approach provides for an easily understood graphical presentation of the five cost driver areas relative to TOC and enables a method to formulate and track the impact of specific cost drivers throughout program life-cycle activities for facilitating the development of cost reduction initiatives. With this insight, GP was able to interpret cost driver information that reduced program infrastructure and R&D costs and converted the savings into revenue flow for the program. The chart format in Figure 1 illustrates a typical generic example of profiling each of the five basic cost driver categories grouped together as a percentage of the total program expenditure. Several subcategories combine together to form each of these five main categories and will be broken down in more detail below. 2% 2% 2% 2% 2% People Paper Parts Performance Places Figure 1 Generic Cost Driver Pie-Chart Profile 1
Phase Transitioning Implementation of the Cost Driver Model on a cradle-to-grave government program usually involves segregating all identified costs into three logical lifecycle phases and constructing separate cost driver profiles typified by the following three chart figures. The first profile contains all Research, Development, Test, and Evaluation (RDT&E) costs which occur prior to the Acquisition (purchase) phase. This profile is typically dominated by nonrecurring engineering design costs grouped within the Performance driver which directly affect the achievement of some operational requirement or performance specification. Figure 2 illustrates this point and also shows the relative representation of the impact to the total amount from the remaining cost drivers at this initial stage of sustainment. 51% 2% 27% 11% 9% People Paper Parts Performance Places Figure 2 RDT&E Profile The second profile contains all Acquisition costs required to purchase and install the system. Figure 3 illustrates percentages of costs from the model at this stage of the life-cycle sustainment. This profile now reflects the transition from a performance dominated phase to one exhibiting an increase in recurring costs such as Parts, system materials (fabricate or manufacture), and that of People required to build, install, and verify (test) system operation. 17% 2% 4% 19% 4% People Paper Parts Performance Places Figure 3 Acquisition Profile 2
The third profile contains all Operation and Support costs necessary to maintain the system throughout its in-service life-span. Figure 4 illustrates the percentages of the cost drivers at this final stage of sustainment. The profile has now transitioned to one dominated by Parts costs. The maintenance actions of upgrades, technology refreshes, and repairs will exist until the entire system is replaced. 6% 6% % 24% 1% People Paper Parts Performance Places Figure 4 Operation and Support Profile In summary, all government programs follow an established sequence of transitional phases. Modeling of commercial programs appear to follow the same process, however different external forces affect the transition. Based on GP s years of use with the Cost Driver Model, the following conclusions have been drawn: For any organization/project, People costs assume a range of 2% 25% (with the exception of the Acquisition profile) for success. If the cost is below 18%, the organization/project slows down and becomes inefficient. If the costs are over 3%, the organization is either wasting or paying too much for resources. For any project, Paper costs are significantly less for commercial systems than that of government systems, by as much as a factor of 1. For any project, Parts costs increase through all profiles. In non-hardware projects, i.e. services, the Parts costs still reflect the dominant cost in the Operation & Support profile. For any project, Performance costs decrease through all profiles. Projects with a continuous improvement process, appear to maintain a constant level of performance, but are simply implementing new RDT&E profiles for each improvement. Eventually, in any performance improvement project/organization, the core requirement of the continuous improvement process will eventually be superseded by technology advancements. For any organization/project, Places costs are dependent on the profile requirements, but should not be more than 5% in any profile. 3
Applying Cost Driver Modeling for Life Cycle Sustainment The life-cycle of a project starts in the RDT&E phase, followed by the Acquisition phase, and ends with the Operation and Support (O&S) phase. Following each phase, the Cost Driver Model allows for a feedback loop to any of the previous phases. This important feature enables smart management of variable program costs resulting in the ability to predict optimal allocation of resources for maximizing downstream savings. Table 1 provides a rough estimate of phase costs as a percentage of TOC as well as the amount to possibly save with intelligent cost budgeting. Table 1 Approximate Savings to TOC According to Program Phases PHASE PERCENTAGE (%) PERCENTAGE (%) OF OF TOC POTENTIAL SAVINGS RDT&E 1 2 Acquisition 2 1 Operation and Support 7 4 Cost Driver Subcategory Breakdown For each cost driver category there are associated cost functions. Table 2 illustrates an example of a government program where the cost functions for each of the five basic categories are explained. A similar table for commercial organizations/projects has been developed by GP. Table 2 Breakdown of Cost Driver Subcategories Cost Drivers Cost Functions Explanation of Cost Functions PEOPLE Management Installation Technical Support Liaison The number of people in a department drives the expense of managing. The major source of cost to the installation is that of the people required to accomplish the task. Re-active response requirement, usually off-site, to assure that system level problems are addressed. Pro-active response requirement on-site to assure that system level problems are addressed. 4
Cost Drivers Cost Functions Explanation of Cost Functions PARTS PLACES PERFORMANCE PAPER Hardware Spares Software Repair/Overhaul Facilities Laboratories Warehouses/Inventory Storage Areas Engineering SUBSAFE Quality Acquisitions ILS CM User Feedback System level components or a purchase requirement. Spares to system level components or a purchase requirement. Required to support the system level components. The action required to bring components to an RFI condition. Areas where workers reside. Areas where development is conducted or equipment is maintained. Areas where parts are maintained. Activities required to design a fix to a problem report/resolve a deficiency/provide a system enhancement. Activities/materials required to meet SUBSAFE requirements. Assurance test activities required to demonstrate and verify system level performance. Activities required to procure system level materials. Activities required to support logistics requirements for system level materials. Activities required to support configuration management of system level materials. Activities required to identify/maintain/report system level problem reports. 5
PERFORMANCE BLOCK COST BLOCK and LINKS PROCESS DRIVER BLOCK OUTPUT OWNERSHIP METRIC BLOCK OOM = New System Operation & Support Costs Baseline System Operation & Support BREAK-EVEN BLOCK 35 Accumulated Cost ($ Millions) 3 25 2 15 1 5 51 51 98 96 5 143 136 1 186 171 15 226 26 2 264 25 241 32 3 276 1 2 3 4 5 6 Number of Acquired Systems Figure 5 Summary Chart of LCCDM Block Approach to Cost Mitigation Analysis 6
Objectives of the Life Cycle Cost Driver Model The primary goal of the LCCDM process is to reduce costs in all phases of a program. To meet this goal, the model provides a metrics-based decision-making process created from meaningful data. The model also allows for smart assessments in the RDT&E and Acquisition phases that will minimize O&S costs. The modeling process evaluates the impact of technical cost drivers on performance, cost, and schedule. It supplements Earned Value Management (EVM) and risk factor identification by assessing cost driver elements through a Links process. It also supports achievement of the goals to reduce/meet the true break-even point by evaluating the technical progress towards achieving that goal. Analytical Features of the Life Cycle Cost Driver Model Figure 5 provides a visual generic presentation of the LCCDM illustrating all features of the process. The five blocks and links process are described below. Performance Block The performance block identifies the relative performance between a current baseline system and a proposed new system. The block provides a means to identify all requirements and compare them to existing or other proposed alternatives. The block allows the developer to determine if all requirements are met. Performance Requirements New SONAR System Reference Document Baseline Cost-Risk Value (1%) New System Cost-Risk Value (1%) MF Passive Common Spec 1 11 MF Active Common Spec 1 1 Transmit Group Common Spec 1 8 Self Noise Common Spec 1 95 Color Key Green System meets or exceeds existing system performance Red System does not meet existing system performance and needs to be fixed Blue System does not meet the existing system performance, however the required change is not cost effective requiring extensive system changes or a complete redesign 7
Driver Block The driver block identifies the cost drivers of the proposed new system including risk mitigation costs and accelerators. An accelerator is an implementation of a project initiative that initially increases the cost within a phase but results in significant savings for follow-on phases thereby reducing program TOC. Utilizing the LCCDM Links functionality, the driver block aligns the proposed system elements between all three lifecycle sustainment phases. Reference sources of the data are required to support the analysis. Cost Driver Cost Identifier Link Element Sub-Element Integrated Product Team (IPT) Risk Mitigation 1 Risk IPT Sensors: Hydrophones Driver: Minimal 31 Reliability Robustness Projectors Connector/mold configuration Driver: Moderate 41 Reliability Survivability Cost Block The cost block provides the media to assign projected, anticipated, and actual costs of the existing system with that of the proposed system. The costs are summarized to determine the total cost of any phase. The example provided is for Operation & Support (O&S) Costs. Cost Driver People 24% Baseline Cost New System Cost Sub Drivers Management Financial Data Center Projects Program Personnel Installation Implementation ALTS Certifications Planning Installation Manager Technical Assistance System Testing System Integration Liaison Shipyards 8
Performance 6% Parts 6% Paper 1% Places < 1% Links Process The Links functionality generates cost driver/risk mitigation relationships for all identified elements in the model. The Links process also identifies relationships between the three phases of life-cycle costing, derives anticipated Link cost-multipliers, and implements accelerators that may result in cost increases/decreases based on decisions made during prior phases. The multiplier indicates the magnitude of such a potential reduction in cost savings. As indicated in Table 1, each phase has a different savings potential that could be achieved by implementing an accelerator initiative. Output Ownership Metric (OOM) Block The OOM block provides an assessment of how the changes made in the RDT&E and Acquisition phases are expected to affect O&S phase costs. A value greater than 1. indicates that the proposed new system will increase O&S costs above the current baseline system. Output Ownership Metric = New System Operation & Support Costs Baseline System Operation & Support Break-Even/Learning Curve Analysis Block The break-even/learning curve analysis block provides an accounting/earned value status as to the achievement in the Acquisition phase to recover the anticipated RDT&E project costs of a proposed new system. The graph in Figure 6 illustrates an example of break-even projection analysis for the GP cost driver model using realistic feedback that continuously fine-tunes cost driver relationships and updates model input data. This result is compared with a baseline projection (blue line) assuming a simple linear fixed-cost per system. An alternate analysis (red line) is also superimposed on the graph to show its projected breakeven point against the constant-sloped baseline. Although the alternate approach appears somewhat realistic by incorporating variable cost factors that reflect learning curve assumptions, it can actually lead to large errors in total cost expectations as the number of acquired systems increases. That is because of false (overly optimistic in 9
this case) input assumptions for values and relationships that multiply over time and generate significant offsets to the true break-even point. 35 Accumulated Cost ($ Millions) 3 25 2 15 1 5 51 51 32 3 264 276 25 226 241 26 186 2 171 143 15 136 98 96 1 5 1 2 3 4 5 6 Number of Acquired Systems Total Acquisition Phase Cost Data ($M) as a function of Systems Acquired Systems Acquired 1 2 3 4 5 6 Cost Driver Model 51* 98 143 186 226 264 32 Alternate Analysis 51* 96 136 171 26 241 276 Baseline System 5 1 15 2 25 3 * Initial RDT&E Investment Incurred as Acquisition Phase Cost Figure 6 Break-Even/Learning Curve Projection Analysis for a Proposed RDT&E Project vs. a Current Baseline Acquisition System 1