Better Acquisition Decisions through Financial Analysis – Part 2

financial analysis imageNo matter how products and services are being acquired, financial analysis can help in decision making to acquire the requirements in the best and most cost effective ways. Federal Government acquisition uses frameworks and processes that leverage several financial tools to maximize the value procured from the solution while decreasing the risk of wasted resources.

In part 1 of this blog post, we explored the importance of financial analysis as well as some of the major tools available for Federal acquisition professionals. Here in part 2, we will see how these tools are used in three Federal acquisition and acquisition support processes: Acquisition Review Process (ARP); Planning, Programming, Budgeting and Execution (PPBE); and Capital Planning Investment Control (CPIC).

1. Acquisition Review Process – The ARP uses a limited set of key acquisition documents for an Acquisition Review Board (ARB) to evaluate an investment’s progress and status at each milestone in the acquisition life cycle to authorize entry into a significant new program phase. The ARB monitors the progression of the acquisition through the life cycle and provides clear guidance to the Component or Headquarters (HQ) contingent that owns the acquisition.

Now, let’s examine what roles these financial analysis tools may play in the ARP phases:

  • Identify Need: In ARP’s first phase, a Program Office with a capability gap identifies a capability need. Acquisition Decision Event (ADE) 0 may be initiated to explore the capability need/gap and if approved, may submit the Preliminary Mission Need Statement (P-MNS) along with a Resource Allocation Plan (RAP) request for funds for a new program.
  • Analyze/Select: In ARP’s second phase, the Program will identify the alternatives, operational requirements and resource requirements to analyze and select the means to provide that capability. In the previous phase, it was determined whether to conduct a full Analysis of Alternatives (AoA) or a more limited Alternatives Analysis (AA) focusing on each Program option’s cost, capability, schedule and risk as factors. Rough Order-of-Magnitude (ROM) cost estimates are developed for comparison of performance versus cost. In preparation for Acquisition Decision Event 1, the Program conducts a more accurate Life Cycle Cost Estimate (LCCE) of the selected option to project the capability’s full cost from initiation to disposal.
  • Obtain: In this phase, the program develops, tests, and evaluates the selected alternative to obtain the capability and prepares it for the Produce/Deploy/Support phase. In particular, the Acquisition Program Baseline (APB) is developed, documenting critical cost, schedule and performance parameters which must be met to accomplish the program’s goals. Cost growth during the program’s performance can be identified through measuring and tracking actual performance against the projected parameters in this document. The LCCE is continuously updated through the program’s life as actual data becomes available, analyzing differences between estimated and actual costs.
  • Produce/Deploy/Support: The last phase of the ARP executes the Production, Deployment, and Support of the capability. All documents previously developed in the preceding phases are updated with actual information to continue the analysis of estimates versus actual costs.

2. Planning, Programming, Budgeting, and Execution – PPBE is a calendar driven, federal directive to maximize the value of capital assets and acquisitions to support defense missions while decreasing risk. It is the primary Resource Allocation Process (RAP) of the Department of Defense (DoD), and one component of the ‘Big “A” Acquisition Process’ – three major decision support systems for defense acquisition along with the event-driven components. The other two components to Big “A” include the Joint Capabilities Integration and Development System (JCIDS) and the Defense Acquisition System.

Similar to ARP, PPBE requires an increased focus on performance metrics to maximize the return on investment. However, the difference with PPBE is that it is formatted specifically for highly structured agencies with considerable capital and human resources such as the DoD, the National Aeronautics and Space Administration (NASA) and the National Oceanic and Atmospheric Administration (NOAA) where it is currently in use. It is a much higher-level budgetary process than ARP, as it concentrates on Department and Agency level organizations versus the Program and Project level.

The financial analysis tools commonly used in the PPBE phases consist of the following:

  • Planning: Using multiple tools and Cost Benefits Analysis (CBA) to drive the planning perspective, the Department forecasts long-range goals superimposed over ever-changing conditions and trends. These analyses assist the Secretary of Defense (SECDEF) in formulating policy and creating a Strategic Planning Guidance (SPG).
  • Programming: In this phase, each DOD component develops a Program Objectives Memorandum (POM) detailing how the component plans to align fiscally constrained and prioritized resources with specific actions into balanced programs to achieve department goals. The programs are the actual activities, supporting equipment, goods and services to be purchased or developed. The POM provides a detailed and comprehensive description of the component’s proposed budget six years into the future, with the opportunity to highlight any important programs that are not funded or fully funded and their projected risks.
  • Budgeting: The Budgeting phase occurs concurrently with the Programming phase and each component completes a Budget Estimate Submission (BES) along with the POM. The BES covers four years: the last completed, current, and next two years; with the purpose of estimating, formulating, justifying and implementing programs in support of strategic planning. The BES is submitted through the Fiscal Year Defense Program (FYDP) – an IT system that captures programs’ budget estimates and strategic plans into the Congressional appropriation structure format, along with associated budget justification documents. Analysts from the office of the Under Secretary of Defense (Comptroller) and the Office of Management and Budget (OMB) review each budget to ensure that programs are funded in accordance with current financial policies, and are accurately and reasonably priced.
  • Execution: The execution review occurs at the same time as the program and budget reviews. It provides OSD senior leadership feedback into the measurement of planned performance measures versus actual performance. Adjustments of the budget or program may be conducted to achieve desired performance goals.

3. Capital Planning Investment Control – As defined in the DHS CPIC Guide,CPIC is an integrated process within an agency for planning, budgeting, procurement, and management of capital assets to achieve agency strategic goals and objectives with the lowest overall cost and least risk. Capital assets include land, structures, equipment and intellectual property used by the Federal Government.

The financial analysis tools commonly used in the CPIC phases are:

  • Pre-Select: When a capability gap is identified or a high-level directive mandates the acquisition of an investment, the component’s strategic and mission needs are evaluated to determine the justification of the acquisition, and several options are chosen for further planning and analysis.
  • Select: Options are put through numerous assessments and analytical tools to select the best investment within the component’s fiscal constraints that will meet the objectives of the program and fill the operational gap. Federal authorities such as the Clinger-Cohen Act of 1996 and other federal mandates may require the execution of a cost estimate or Independent Government Cost Estimate (IGCE), LCCE, CBA, AA and/or AoA- according to the properties of the capital asset during its selection.
  • Control: As the program implements or develops the selected capability, component leadership monitor and review the capability’s performance and quality to ensure that the solution is managed within the pre-approved cost, schedule and performance goals. Earned Value Management (EVM) is used to measure the investment’s performance and make adjustments as necessary to ensure performance aligns to planned forecasts.
  • Evaluate: These measures, milestones and planned activities are reported through a Capital Investment Plan (CIP), Resource Allocation Plan (RAP) and other CPIC tools such as the program-level Exhibit-300 (E-300) Business Case or the Component-level Exhibit-53 (E-53).
    • A non-CPIC tool that would be beneficial in this phase to DOD programs is the Post Implementation Review (PIR): a sequence of activities during a program’s acquisition and/or operation, used to confirm that actual metrics (e.g., ROI) are in-line with business case projections. Some of the activities include:
      • Force Operations Test & Evaluation (FOT&E) Results
      • Platform Readiness
      • CC Exercise
      • IA Assessments
      • Return On Investment (ROI)
      • Lessons Learned

Financial Analysis is Good Business

ARP, PPBE and CPIC utilize tools that: drive the selection of an investment that best meets the Government’s needs; support detailed estimation and analysis to justify the investment; strengthen the management of the procured investments; and track expenditures and performance for best practices to assist in future acquisitions.

Financial analysis should be conducted throughout the acquisition life cycle, from research, to planning, procurement, execution and disposal. Using the tools we discussed is not just good practice, but good business.

As described in the real-world example of part 1 , the government, the contractors it pays for goods and services, and ultimately the public are at greater risk when accurate and detailed financial analysis is not completed.

Sources:

DHS Acquisition Instruction 102-01-001

Defense Acquisition Guide Book

Glossary of Defense Acquisition Acronyms & Terms, 15th Ed.

DHS CPIC Guide

 

Speak Your Mind

*