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Plenary Panel – Estimating Return on Investment & Valuing Real Options in Acquisition Thursday, May 18, 2006 8:30 a.m. – 10:00 a.m. Estimating Return on Investment & Valuing Real Options in Acquisition Chair: Tom Housel – Naval Postgraduate School Papers: Using KVA and Real Options Analysis in Acquisition: Two Case Studies Johnathan Mun, Naval Postgraduate School Tom Housel, Naval Postgraduate School Estimating Return on Investment and Valuing Real Options in Acquisition: “Market Comparables” Glenn Cook, Naval Postgraduate School Capt Scott Uchytil, USMC, Naval Postgraduate School = = ==================^Åèìáëáíáçå=oÉëÉ~êÅÜW=ÅêÉ~íáåÖ=ëóåÉêÖó=Ñçê=áåÑçêãÉÇ=ÅÜ~åÖÉ=======- 305 - = =
Using KVA and Real Options Analysis in Acquisition: Two Case Studies Presenter: Johnathan Mun, is the founder and CEO of Real Options Valuation, Inc., a consulting, training and software development firm specializing in real options, employee stock options, financial valuation, simulation, forecasting, optimization and risk analysis located in northern California. He is the creator of the Super Lattice Solver software, Risk Simulator software and Employee Stock Options Valuation software at the firm. He has also authored numerous books including Real Options Analysis: Tools and Techniques, Real Options Analysis Course: Business Cases, Applied Risk Analysis: Moving Beyond Uncertainty, and others. Tom Housel, specializes in valuing intellectual capital and knowledge value measurement. He is currently a tenured Full Professor for the Information Sciences (Systems) Department. He won the prestigious Society for Information Management award for best paper in the field in 1986. His work on measuring the value of intellectual capital has been featured in a Fortune cover story (October 3, 1994) and Investor’s Business Daily, numerous books, professional periodicals, and academic journals (most recently in the Journal of Intellectual Capital vol. 2 2005). Abstract The United States has experienced dramatic changes in national security over the past 15 years, shifting away from the conventional threats posed during the Cold War era to more unconventional threats as evidenced by the tragic events of September 11 and the continuing global war on terrorism. To meet the challenges of the new national security environment, the Department of Defense (DoD) plans to spend $1.3 trillion between 2005 and 2009 for major programs ranging from new intelligence programs to homeland defense and military operations overseas. 1 With lives at stake and billions of dollars at risk, difficult choices are made by the DoD on which projects to fund where tradeoffs occur. Should investments be made towards personnel or towards new technology? Should more funding be allocated towards intelligence collection or processing? To evaluate and select projects returning maximum benefits, new measurement tools are critical to properly define, capture and measure the total value of investments. These tools must be capable of capturing data across a spectrum of organizations to compare processes, capabilities, costs, revenues and other benefits. In addition, they must incorporate elements of uncertainty and risk that are inherent in predicting the future. Understanding uncertainties and the potential impact of risks can significantly improve the likelihood of successful investment decisions. This research utilized the Knowledge Value Added/Real Options (KVA+RO) valuation framework to address those issues. KVA+RO is designed to support information technology (IT) portfolio investment decisions. It is intended to empower decision-makers by providing performance-based data and analyses like the ROI on individual projects, programs and 1 GAO. (November 2005). Better support of weapon system program managers needed to improve outcomes. Washington DC, author. = = ==================^Åèìáëáíáçå=oÉëÉ~êÅÜW=ÅêÉ~íáåÖ=ëóåÉêÖó=Ñçê=áåÑçêãÉÇ=ÅÜ~åÖÉ=======- 306 - = =
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Author(s) Title Publisher Issue Dat
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The research presented at the sympo
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Preface and Acknowledgements Those
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The NPS A Team Rear Admiral James B
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4 th Annual Acquisition Research Sy
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PANEL -- IMPLEMENTING AN OPEN SYSTE
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Plenary Panel - Acquisition Reform
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In May 1996, Rear Adm. Hamilton bec
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Panel - Enhancing Collaborative Cap
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Collaborative IT Tools Leveraging C
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Group’s Perceived Usefulness Grou
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diagnose collaborative capacity enc
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Organization A Problem Interagency
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Incentives - Collaboration as a pre
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Two other frequently cited barriers
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Panel - Analytic Approaches to Shap
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Discussant: Michael McGrath - Deput
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Panel - Strategic Sourcing Wednesda
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Abstract In this paper, we examine
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support from the taxpayer. A key co
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etc. (Figure 1) (Kraljik, 1983). Vi
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that companies adopted a strategic
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Benchmarking Industry According to
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80% 70% 60% 50% 40% 30% 20% 10% 0%
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initiatives. In efforts to reduce s
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eduction goals. Also, in the same m
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Conclusion The DoD is struggling to
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Gabbard, E. G. (2004, April). Strat
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Staff. (2005, December 8). Hacket r
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Panel - Implementing RFID in the De
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What Is the Right RFID for Your Pro
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Introduction The evolution and appl
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Literature Review RFID technology w
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The reader is a device used to coll
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Active tags sometimes have sensors
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An RFID network with open architect
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Passive tag application: Railcar ta
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This system has lowered the risk of
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Because of the temperature-induced
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Thereafter, through a process of tr
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to be read at a few inches by an op
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RFID technology has even enhanced s
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The Costs of RFID operation An RFID
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• Abandonment: The ability to aba
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Fleisch, E., & Tellkamp, C. (2005).
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Williams, D. (2005, August 4). Pres
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logistics systems from the military
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Panel - Transforming the DoD Acquis
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upon the best knowledge and practic
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cost, this form appears to be the m
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access to, and conducted his analys
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organizational problems surface thr
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Change in analytic framework. Burea
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As we look at the effort to change
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interpretation or narrative. What
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common construction. Rather, sense-
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There will be a temptation for acto
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modeling suite. The key comparison
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This model provides us also with th
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here, particularly if the organizat
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organization identified through pri
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Levitt, R.E., Thomsen, J., Christia
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BACKGROUND To an extent, we are add
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Concept Refinement Concept Decision
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some subset of commercial “best p
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transforms the value of a public-se
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We also assume that since the gover
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Of course, we know in reality that
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CONCLUSIONS The acquisition of publ
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Panel - Issues in Acquisition and P
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To What Extent are DoD Activities C
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NAVSUP Data Call (2003 and 2004) FI
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exemption from a particular regulat
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time in the procurement schedule, a
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should be fully supported by applic
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example, federal government, state
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ADR Techniques Traditional litigati
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out the top three with 25.7% of res
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It is a consensus building, public
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Investigative Question 1—Conclusi
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Question 3b: Did the ADR process us
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suited than another to resolution.
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Investigative Question 7: Barriers
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customer, and each of these service
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Panel -- Implementing an Open Syste
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Open Systems and Modular Open Syste
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procurement planning phase include
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procurement documents and specific
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system technical architecture requi
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These evaluation factors are tradit
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In the Cost Reimbursement contract
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technical, schedule, and past perfo
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Developing Performance Based Requir
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The DoD Performance Specification d
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due to many of the reasons presente
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even if there were ten other upgrad
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software developers can employ when
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Conducting this analysis will be as
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integration of “best of breed”
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Reform of Budgeting for Acquisition
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350000 300000 250000 200000 150000
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In fact, the disagreement between t
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Functional Area Analysis D O T M L
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Though many in Washington blame the
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In response to an open-ended questi
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CAPITAL BUDGETING IN THE DoD AND TH
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investment. Full funding also helps
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c. Functional Requirements If it is
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4. Budgeting Phase of Capital Progr
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private firm, one can combine the t
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4. Acceptance of a project using th
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Another disadvantage of the payback
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Another guideline is that firms mus
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This concept has remained consisten
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purchases. Also, the Office of Mana
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CONCLUSIONS The current practices o
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REFERENCES Bierman Jr., H., & Smidt
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Ratnam, G. (2005, December 12). Big
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Brian C. Payne, Captain Instructor
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A Transactions Cost Economics (TCE)
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SECTION 1: INTRODUCTION This report
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SECTION 2: REVIEW OF TRANSACTION CO
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cooperative agreements, but since t
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characteristic that defines many ou
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The added risk faced by military co
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J) Some Empirical Evidence On the w
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unproductive bargaining and influen
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also include the costs of internal
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N) Results from a Bargaining-game M
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efforts to screen for reliability a
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Program Managers lead Program (Proj
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Table 2. Research, Development, Tes
Page 267 and 268: To minimize transaction costs for t
Page 269 and 270: A recent initiative to accommodate
Page 271 and 272: Technical complexity within a syste
Page 273 and 274: As briefly introduced above in Sect
Page 275 and 276: Table 5. Typical Contract Type by P
Page 277 and 278: multiyear procurements and other ty
Page 279 and 280: Alpha Contracting reduces procureme
Page 281 and 282: SECTION 4: SYNTHESIS AND CONCLUSION
Page 283 and 284: Finally, DoD contracting practice w
Page 285 and 286: Productive Effort Parameters Unprod
Page 287 and 288: f. Operational Significance. (added
Page 289 and 290: enchmarks, and the like. Elements T
Page 291 and 292: Cooter, R., Marks, S., & Mnookin, R
Page 293 and 294: Nissen, M. E. (1997). JSOW alpha co
Page 295 and 296: Development of Measures of Success
Page 297 and 298: of acquisition practitioners to all
Page 299 and 300: Attributes of Good Metrics. Certain
Page 301 and 302: Center ACEs were from separate loca
Page 303 and 304: unique. Every interview transcript
Page 305 and 306: appropriate. However, when asked if
Page 307 and 308: they are receiving in their attempt
Page 309 and 310: forcing each activity and report to
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Page 313 and 314: corporate Air Force acquisition ini
Page 315 and 316: Hayes, B. Measuring Customer Satisf
Page 317: Pope, K. Measuring the Effect of th
Page 321 and 322: Estimating Return on Investment and
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Page 325 and 326: “I have determined that the curre
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Page 329 and 330: Panel - Perspectives in Program Man
Page 331 and 332: Best Practices: Better Support of W
Page 333 and 334: When Should You Terminate Your Own
Page 335 and 336: - Management activities, expenditur
Page 337 and 338: RF COMMUNICATIONS DIVISION ROCHESTE
Page 339 and 340: REQUIREMENT HF MANPACK TACSAT VHF/F
Page 341 and 342: Figure 4. System Components INTEGRA
Page 343 and 344: My best technical experts would spe
Page 345 and 346: “JULIE-GATE” The program was st
Page 347 and 348: All agreed it was finally over, and
Page 349 and 350: A short time later, the world waite
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Page 353 and 354: managing systems with tipping point
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Page 357 and 358: Although the plant did not begin co
Page 359 and 360: snt - add-new-tasks strength {work
Page 361 and 362: einforcing loop. We show how, throu
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Page 365 and 366: Frac requiring rework (Frw ) 1.0 0.
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provide opportunities for improveme
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divided into avoiding tipping point
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The horizontal axis of Figure 14 re
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Total Backlog Total Backlog/Initial
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deadline and ensuring that it is re
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unrealistic due to drastic changes
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Kharbanda, O., & Pinto, J. (1996).
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Panel - Service Contracting Thursda
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Managing the Services Supply Chain
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include professional, administrativ
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Service Characteristics and their I
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given stage is made dependent on th
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contracted effort. The procurement
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Construction, Repair and Maintenanc
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The second phase of the procurement
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human capital. This is partially du
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for the contracting of services wil
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Yet a RAND study of the Army showed
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services, the Army appears to have
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(janitorial) services, food service
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Each requirement organization provi
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Brown, S. W., Gummesson, E. Edvards
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Gronroos, C. (1982). Strategic mana
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What Works Best when Contracting fo
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Panel - Earned Value Management Thu
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Measuring Uncertainty in Earned Val
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level of rate-of-change and the abs
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But, if the widget is only half com
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so more rapidly in environments cha
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Impending Task Delays (ITD) can be
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with: v: In the Fisher model, it re
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In discrete time form, the estimati
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Thus, various types of delay such a
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Entropy The uncertainty (non-specif
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Panel - Contractors in Support of M
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Contractors Supporting Military Ope
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drivers and other historical refere
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Another factor driving toward incre
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number of highly experienced Blackw
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Unity of command is one of the prin
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was reimbursed for expenses actuall
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principles, such as unity of comman
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aircraft involved in re-supply miss
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President Cheney) has apparently ma
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modest proposals for incremental ch
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In July 1937, the “China Incident
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President Roosevelt’s assistant,
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Pilots of the Flying Tigers receive
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was larger than the marine aid stat
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Merchant vessels kept Britain in th
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The final vignette involves Charles
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contract (Wake Island pre-war). In
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purposes continues to be the “leg
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Going to War with Defense Contracto
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Abstract This paper reports on an e
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Table 1: Factor loadings and alpha
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depict causal relationships tested
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work-related experience than younge
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Discussion and conclusion On averag
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2003 - 2006 Sponsored Acquisition R
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NPS-PM-04-017 Matthews, David. The
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Technical Reports NPS-GSBPP-03-003
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