What We Do: Benefits QuantificationTuesday August 23, 2016
Cobec develops (defines, calculates, and monetizes) benefits for major FAA acquisitions in order to develop robust program business cases and to calculate program return on investment.
At most companies, finance professionals analyze corporate capital investments by developing discounted cash flow models that incorporate project costs (capital and operating costs) and revenue and forecast these cash flows over the life of the project to determine the return on investment.
In government acquisitions, value is measured differently.
Instead of measuring revenue, the government calculates program benefits to all!
What Are Benefits?
The government measures benefits as incremental value, generated as a result of an investment or acquisition. For these examples, we will examine benefits to one specific government agency, the Federal Aviation Administration (FAA).
Benefits to Whom?
While the FAA measures program costs as costs incurred by the agency to invest and maintain the program, benefits are measured across multiple stakeholders. The FAA identifies recipients of benefits to three major categories: (1) users of services, (2) providers of services, and (3) society. For quantification, these categories are broken down further into benefits (1) to the agency, (2) to airlines, companies, and military, and (3) to the flying public.
Are you a user of a service? Do you take commercial flights for business or to go on vacation? Then, the FAA measures benefits to you!
The government agency is not the only recipient of program benefits. It could be a business man flying from Washington to New York City, avoiding a flight delay. Or, it could be a family flying to Florida for a vacation, spending less time on a plane or at the airport.
Government Business Cases
Much like in industry, the FAA develops business cases for each potential capital investment or acquisition program where the agency invests money to improve the National Airspace (NAS), expecting a return or benefit. Some examples of FAA benefits include maintaining existing air traffic infrastructure, creating flight efficiencies, adding capacity to airports, decreasing inefficient spacing between aircraft in en route airspace, increasing flight safety, or reducing flight time.
What’s the Problem?
First, in developing business cases, the analyst must define the problem that the program is trying to solve. At the FAA, this problem can materialize as:
- System obsolescence,
- Infrastructure or system sustainability problems,
- Inefficient air travel,
- Airspace congestion,
- A risk of safety hazards,
- Or any combination.
Once the problem is defined, the agency must quantify the problem by some traceable metric (flight delays, flight cancellations, frequency of loss of separation, excess distance flown, etc.). Once the problem is quantified, the agency monetizes the shortfall, translating inefficiency metrics into dollars.
What Part Can We Solve?
As a business case, the FAA compares program benefits to costs over the lifecycle of the program (from development until replacement). So, now that we have identified and measured the problem, how do we calculate benefits?
The FAA measures benefits by determining how much of the current problem the proposed solution (the investment) can solve. Once we quantify the problem, the Program Shortfall diagram below, what part of the shortfall can be solved by our investment? In most cases, an investment can solve only a portion of the total problem identified. In the Program Benefits diagram, the blue represents the remaining shortfall the program cannot solve. The orange represents the parts that can be solved. This is what we call the program benefits.
New Technology Example
The easiest way to understand how benefits are identified, measured, and quantified is to explore a real-world example. In this case, we evaluate a radar system. At a congested airport like Atlanta (ATL) or San Francisco (SFO), a busy airport might have reached its maximum flight capacity during peak periods. This might increase delays, cause flight cancellations, and limit the number of flights an airport can manage a day. Passengers might not be able to travel when they want to with the limited flight availability. Airlines might forgo additional revenue by limiting the number of flights to a specific high-demand airport, and the FAA might have to increase air traffic control staff to manage the congested air traffic. This is the problem or “shortfall.”
By investing in a new technology, like high-update rate radar, the FAA could safely conduct simultaneous departures and arrivals on closely spaced parallel runways. The ‘benefit’ of the investment could be an increased number of operations (arrivals and departures) at the busy airport, increasing the number of travelers each day and during peak travel times, reducing the number of flight delays and cancellations, and increasing airport capacity.
Air travelers would have more flight options and would not have to wait for an alternative flight at another airport or during an inconvenient flight time. Airlines could fly more aircraft and grow their business and revenue. And, the FAA could reduce the frequency of incurring overtime costs and potentially increase safety (closely monitoring separation).
Several years ago, the FAA did invest in a high update radar system, resulting in the ability to operate simultaneous triple arrivals at Atlanta and simultaneous dual arrivals and departures at San Francisco.
At Cobec Consulting, our management consultants employ a creative yet methodical approach toward calculating benefits for our clients.
Shortfall and benefit development is a core competency at Cobec, and over the last two years, we have invested extensive resources into adding benefits quantification and visualization tools like FlightSync and in-house databases to develop a comprehensive benefits boutique for business cases. Not only do our clients utilize experienced benefits consultants who draw from a library of business case-specific algorithms, but they employ a cost-effective comprehensive business case solution that is easy to understand for clients and decision-makers alike.
We encourage you to explore our website and visit the FlightSync web site at www.cobecflightsync.com to learn more.