FAQ—Lifecycle Return on Investment
1. What is the purpose of this effort? As stated in the 30 June 2006 memo “Improving System Functional Scope and Return on Investment Information (ROI)”, the purpose of this effort is to improve the visibility of business systems functionality and ROI as depicted in the Enterprise Transition Plan and to leverage this information during the investment review board (IRB) certification approval and annual review processes to improve Department of Defense (DoD) investment decisions. 2. What are Components required to do? Components are being asked to update the DoD Information Technology Portfolio Repository’s (DITPR) with the functional scope (“To Be” Operational Activities and System Functions) and to provide “lifecycl e ROI (LROI)” information for all Enterprise Transition Plan (ETP) target systems listed in the June 30, 2006 memo by 21 July 2006. This is a new metric and a specific Lifecycle ROI Calculator (LRC), which is posted to the Business Transformation Agency (BTA) portal, is to be used to perform the calculations and the LROI worksheets are to be saved on the BTA portal, in the Transition Planning sub-directory (see FAQ 12 for more detailed information in accessing the portal and posting documents there). 3. What is ROI? Return on Investment, or “ROI,” refers to a collection of metrics which are used to measure the financial benefit gained through an investment. 4. Which financial metrics are used by DoD to measure financial benefit? The three financial return metrics used by the DoD to measure an investment’s ROI are: Net Present Value (NPV), Benefit Cost Ratio (BCR) and breakeven. These metrics may be measured on an incremental and, in some cases, on a lifecycle basis. These metrics are described in the diagram below.
Standard DoD Financial Return Metrics
Three metrics are commonly used in DoD to measure a system’s return on investment Standard DoD Financial Metrics
Net Present Value (NPV) Benefit / Cost Ratio (BCR) Breakeven
Analytic Usage
Incremental Lifecycle
Definition
Calculated by subtracting the system’s adjusted cost from the total present value of its benefits. A system’s NPV should be greater than $0.00 to be considered for investment. Calculated by dividing the system’s total present value of benefits by the adjusted cost. Systems that have a BCR greater than 1.0 are considered economically viable. The year or month in which the sum of benefits first exceeds the sum of the costs expressed in current dollars.
FAQ – Lifecycle Return on Investment
Business Transformation Agency
July 7, 2006
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5. What is the difference between a lifecycle and an incremental ROI? Two types of financial analyses – lifecycle and incremental - can be performed when evaluating an investment in a system. A lifecycle ROI analysis measures the financial return of all cash flows resulting from an investment in a system, from initiation of its development to a point in time beyond its attaining Full Operational Capability (FOC). An incremental ROI analysis measures the financial return of cash flows resulting from an investment in a system from the current point in time forward. The figure below illustrates the differences between incremental and lifecycle analyses.
Measuring Financial Returns
Future Today
Sunk Cost Budgeted Cost FOC
FY03 Capital O&M Total
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY21
FY22
…
Realized Benefit Projected Benefit
Inputs
FY03 Benefit
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
…
FY21
FY22
Discounted cash flow (DCF) analyses
Incremental Lifecycle
Breakeven NPV, BCR
3
Financial return metrics
As an example, a system has been in the acquisition and development process since fiscal year 2003 (FY03), it is expected to achieve FOC in FY10, and cash flow data is provided through FY21, at which time the system will be terminated. That system will submit a request for approval of modernization funding for the period FY07-09. A lifecycle ROI analysis will measure the financial returns (NPV and BCR) of the system from FY03 to FY21. An incremental ROI analysis will measure the financial returns (NPV, BCR, and breakeven) of the funding requested. The incremental analysis will cover the period from FY07-FY21. 6. Why is “Breakeven” not being used? Breakeven is a financial metric used to determine the point in time at which the financial benefits derived from an investment in a system exceed its costs. It is usually reported in terms of the fiscal year or months since an investment’s inception at which breakeven is achieved, e.g., FY12 or 60.5 months. Breakeven is normally a forward-looking, or incremental, financial analysis metric. Determining a system’s lifecycle ROI requires including in the analysis the system’s sunk costs and realized financial benefits, neither of which is included in a breakeven analysis. Consequently, while breakeven may be a valid financial metric for an incremental ROI analysis, its use in a lifecycle ROI analysis is inappropriate. 7. What is the Lifecycle ROI Calculator (LRC)? The LRC is an Excel-based tool that converts system’s financial data to ROI metrics. The system’s costs (sunk and budgeted) and benefits (realized and projected) are manually entered into the LRC, which then automatically calculates the program’s lifecycle ROI metrics. The two financial returns metrics that will be calculated by the LRC for use in this effort are lifecycle Net Present Value (NPV) and lifecycle Benefit-to-
FAQ – Lifecycle Return on Investment
Business Transformation Agency
July 7, 2006
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Cost Ratio (BCR). To capture lifecycle costs, the data should span, at a minimum, the system’s lifecycle costs from its inception to its attainment of Full Operational Capability (FOC). 8. How are NPV and BCR calculated? A system’s NPV is obtained by summing the present values of an investment’s costs and benefits. Its BCR is attained by dividing the present value of an investment’s benefits by the present value of its costs. Preferred solutions should have a positive NPV and a BCR equal to or greater than one. Using the two metrics together in an analysis allows a manager to better judge the relative financial merits of each investment listed in a set of potential investments. 9. Can I use DITPR to calculate and report the ROI information? At this time, DITPR’s Economic Viability (EV) capability calculates NPV and BCR on an incremental basis only. It is anticipated that DITPR will support the calculation of lifecycle ROI metrics in a future update to the system. Until that update has been implemented, Components should use the LRC. 10. What if I already have created an Economic Analysis, Life Cycle Cost Estimate, or Cost/Benefit Analysis for this system? An Economic Analysis (EA), Life Cycle Cost Estimate (LCCE), or Cost/Benefit Analysis (CBA) is an excellent initial data source for this effort since these documents helped establish a system’s financial justification. However, accurately determining a system’s lifecycle ROI requires data about the system’s sunk costs and realized benefits in addition to that of its budgeted costs and projected benefits, data which is typically not present in an EA, LCCE, or CBA. Further, unforeseen events can render initial cost and benefit assumptions invalid or off the mark. Unless an EA, LCCE, or CBA has been updated annually, its financial data will require adjustments in order to provide a reliable estimate of a system’s lifecycle ROI. An approach that could be used is to start with data from one of the three documents (whichever is available), update its data based on actual program execution, and enter the updated data in the Excel tool 11. Can I use an OMB Exhibit 300? An OMB Exhibit 300 (E-300) is of limited use for this effort. The financial data provided in an E-300 typically does not span a system’s lifecycle. Additionally, the E-300 does not provide a system’s financial data at the level of the granularity required by the LRC. 12. When on the BTA portal will I find the LRC tool and where should I save my worksheet when finished? The LRC tool is located on the Business Transformation Agency (BTA) portal, Transition Planning section. Additionally, all completed system and initiative LRC worksheets are to be saved by the submitter to the BTA portal. Component Transition Planning personnel should already have access. However, those who do not have portal access should go to URL: https://spsbmmp.dfas.mil, and complete the online form to request access; select TP&P from the Team list; and contact Charlie Clark at charlie.clark.ctr@bta.mil providing an explanation for the access. Once the portal has been accessed, follow the information below or access directly using the appropriate link (see below): 1. Go to the Enterprise/Component worksite under LINKS. FAQ – Lifecycle Return on Investment Business Transformation Agency July 7, 2006
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2. Once on the Enterprise/Component worksite look for the Enterprise (BEP) or Component headers in the right hand column. 3. Select your specific BEP or Component name from the list. This will display a list of folders. 4. Open the folder labeled: ROI, to locate the ROI template. 5. Checkout the ROI document to maintain version control and prevent others from editing the document without your knowledge. 6. Open ROI document in SharePoint portal environment or right click and save offline using "Save Target As" function. If you have not uploaded a completed document in the TP Portal environment, please contact Charlie Clark for instructions. NOTE: files should be saved using the following naming convention: SYSTEMACRONYM_LROI_YYYYMMDD (example: ACES_LROI_20060710)
Links:
Army - https://spsbmmp.dfas.mil/sites/TransitionPlanning/EnterpriseComponent/Army/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2d Component%2fArmy%2fROI&View=%7b7C233D69%2dCBC9%2d49CA%2dA550%2dD3506B700F 45%7d Navy - https://spsbmmp.dfas.mil/sites/TransitionPlanning/EnterpriseComponent/Navy/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2d Component%2fNavy%2fROI&View=%7b6762150B%2d8BC9%2d4DBC%2d942F%2d70D71A86B93 F%7d Air Force - https://spsbmmp.dfas.mil/sites/TransitionPlanning/EnterpriseComponent/Air%20Force/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterpri se%2dComponent%2fAir%20Force%2fROI&View=%7bAF249870%2d41E6%2d4298%2dA5CD%2d 4CB9ED632BC9%7d DLA - https://spsbmmp.dfas.mil/sites/TransitionPlanning/EnterpriseComponent/DLA/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2dC omponent%2fDLA%2fROI&View=%7b7D1D577B%2dBF10%2d4E99%2d9B9E%2d51018CC24342 %7d DFAS - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/DFAS1/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2 dComponent%2fDFAS1%2fROI&View=%7bC8428010%2d5251%2d4191%2dB9C8%2dA914222F1C FC%7d USTRANSCOM - https://spsbmmp.dfas.mil/sites/TransitionPlanning/EnterpriseComponent/TRANSCOM/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterpr FAQ – Lifecycle Return on Investment Business Transformation Agency July 7, 2006
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ise%2dComponent%2fTRANSCOM%2fROI&View=%7bBC0266D7%2dCA35%2d44C4%2d8C1A%2 d7FCBA1663E57%7d PV - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/Human%20Resources%20Management/Forms/AllItems.aspx?RootFolder=%2fsites%2ftran sitionplanning%2fEnterprise%2dComponent%2fHuman%20Resources%20Management%2fROI&View =%7bF9C232E9%2dFC59%2d4C6B%2d94F8%2d5372F081359A%7d AV - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/Acquisition%20Visibility%20BEP/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitio nplanning%2fEnterprise%2dComponent%2fAcquisition%20Visibility%20BEP%2fROI&View=%7b54 A9F137%2d5ED3%2d4367%2d840C%2dD902926C0E2E%7d MV - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/Materiel%20Visibility/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2 fEnterprise%2dComponent%2fMateriel%20Visibility%2fROI&View=%7b2282251D%2dC294%2d483 9%2dAC9A%2d2BB4DAB55562%7d CSE – https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/CSE/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2dC omponent%2fCSE%2fROI&View=%7b784EA66E%2d331F%2d49C5%2dB4AA%2d9D44FF23B8ED %7d FV - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/Financial%20Management/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplannin g%2fEnterprise%2dComponent%2fFinancial%20Management%2fROI&View=%7bE8090959%2d2851 %2d4A7C%2dB471%2d8E2BCC38CD4B%7d RPA - https://spsbmmp.dfas.mil/sites/transitionplanning/EnterpriseComponent/RPA/Forms/AllItems.aspx?RootFolder=%2fsites%2ftransitionplanning%2fEnterprise%2dC omponent%2fRPA%2fROI&View=%7bF700CA62%2dBB30%2d46FD%2d9129%2dBCA558801F44 %7d
FAQ – Lifecycle Return on Investment
Business Transformation Agency
July 7, 2006
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