DON IT/C YBERSPACE E FFICIENCIES E NTERPRISE A RCHITECTURE E MERGING T ECHNOLOGY E NTERPRISE C...

DON IT/CYBERSPACE EFFICIENCIES • ENTERPRISE ARCHITECTURE • EMERGING TECHNOLOGY • ENTERPRISE COMMERCIAL IT STRATEGY • CYBERSECURITY • CYBER / IT WORKFORCE INVESTMENT MANAGEMENT • CRITICAL INFRASTRUCTURE • INFORMATION SHARING • KNOWLEDGE & RECORDS MANAGEMENT • PRIVACY • NAVAL NETWORKS • ENTERPRISE SERVICES


DEPARTMENT OF THE NAVY CHIEF INFORMATION OFFICER

Commercial Best Practices for IT Pricing Adapted to DON/DoD

Floyd Groce | DONCIO IT Efficiencies Branch

John Zettler| Contractor support to the DONCIO

May 15, 2013DCO URL: https://connectcol.dco.dod.mil/itpricing15may2013v1

Dial Up: 1-866-783-7350; passcode: 6928919#




Continuous Learning Points (CLPs)

1) You must have signed in DCO for this course

2) Please email - Bruce Whiteman :

([email protected])

with your contact data (Please include: Full Name, Rank if Applicable, Email Address, and Primary Phone Number), which course you participated in(Commercial Best Practices for IT Pricing Adapted to DON/DoD), and date/time of the course

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Agenda

Introduction TCO Example – Smart Phone Overall IT Spending by Category Team Approach Process

– Planning & Initial Cost Estimate– Cost Model– Review & Analysis– Final Plan & Cost Estimate– Execute to Plan, Revise as Needed

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Introduction

Today’s Presenter:

John ZettlerPricing/Costing SME

BuySide Partners (Contractor Support to DoD ESI)

33 Years Cost/Price/Financial Experience

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Total Cost of Ownership (TCO) Example – Smart Phone

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PhonePhone

SvcText Data

2 Year Tot

TCO% of TCO

NR$50 $10 $5 $30 $1,080 $1,130 4.4%$100 $10 $5 $30 $1,080 $1,180 8.5%$200 $10 $5 $30 $1,080 $1,280 15.6%

Acquisition Cost of Phone % of TCO/LCC

Monthly Recurring




Focus of TCO Example

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Acquisition Cost (NR- Non-Recurring) is only one element of the Total Program Cost.

PhonePhone

SvcText Data

2 Year Tot

TCO% of TCO

NR$50 $10 $5 $30 $1,080 $1,130 4.4%$100 $10 $5 $30 $1,080 $1,180 8.5%$200 $10 $5 $30 $1,080 $1,280 15.6%

Acquisition Cost of Phone % of TCO/LCC

Monthly Recurring

Looking at the Total Cost of Ownership (TCO) / Life Cycle Cost (LCC) is the Best Method to Determine:

– Affordability– Budgetary Requirements – Best Value




IT Market Data – Spending by Category

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Gartner Global IT Spending Outlook ($B)

2011 2012 US Federal*Hardware $404 $421 27.0% $22Software $267 $280 18.0% $14Services $845 $856 55.0% $44

$1,516 $1,557 $80

* - Category %s Imputed from Gartner Global Data




Hardware27%

Software18%

Services55%

IT Spending by Category IT services spending include costs such as:– Professional Services – Hardware Maintenance– Software Maintenance

and Support– Software Assurance

IT Market Data – Spending by Category

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Initial Acquisition Costs (Hardware and Software) comprise less than 50% of annual IT spending.




Team Approach

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Commercial Best Practices - Composition of Team/Team Leaders/Roles

CIO / CTO OversightProgram Manager/Capture ManagerTechnical Team Solution Architect Lead Technical Estimator Tech Team and SMEs (inc. End Users)Pricing/Cost EstimatingContracts/LegalSubcontracts & Purchasing

DoD/Government Equivalent Team/Team Leaders/Roles

CIO OversightProgram Manager / TeamTechnical TeamBFM / Cost / Price AnalystsEnd User Representatives Contracting Officer (KO)




Contractor Team Approach

Each Team/Member has Specific Roles in Area of Expertise Program/Capture Manager – Lead an integrated team approach, make day-to-day decisions,

elevate key decisions and facilitate Executive reviews. Technical Team – Develops and refines technical solution to meet all requirements including

planned requirement growth/updates, in the lowest TCO manner. Documents the solution in an organized format (WBS, SOW/BOEs) including time-phased resource estimates required to execute the solution

Pricing/Cost Estimating – Leads the team from a cost and price analyses focus, converting resource estimates into costing/pricing. Provides financial support to “what-ifs” and other programmatic and technical alternatives, all under the umbrella of TCO/LCC.

Contracts/Legal – Leads the team from the legal and contractual viewpoint between the Contractor and the Customer, ensuring that the resulting contract/agreement captures all the terms and conditions required to implement the solution as intended without future disagreements or disputes.

Subcontracts and Purchasing – Negotiates and executes all agreements and purchases between the Contractor and suppliers, ensuring that the resulting subcontracts/purchase orders contain required terms and conditions

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Possible DoD Team Approach

CIO/CTO Oversight - Executive Level Review and Sponsorship Program Manager/Team – Lead an integrated team approach, make day-to-day decisions,

elevate key decisions and facilitate Executive reviews. Technical Team (may include SETA Contractors) – Develop and refine requirements (including

planned requirement growth/updates) and technical approach with focus on the lowest TCO. Documents the approach in an organized framework (WBS, SOW, etc.) including time-phased resource estimates which facilitates the IGCE/budgetary estimate. The Tech team should include senior and working level end-user representation.

Business/Financial Manager, Price, Cost, Budget Analysts – Leads the team from a cost and price analyses focus, converting resource estimates into cost estimates. Provides financial support to “what-ifs” and other programmatic and technical alternatives, all under the umbrella of TCO/LCC.

Contracting Officer (KO) – Leads the team from the contractual viewpoint focused on maximizing bidder/Prime Contractor competition, creativity, and ability to deliver acceptable lowest TCO solution. The KO must ensure that the resulting contract captures all the terms and conditions required to implement the solution as intended without significant future disagreements or disputes. The KO should engage Subject Matter Experts as needed (i.e. DoD ESI SPM for COTS Software Procurements).

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Examples of Issues if Team Approach not Used

Lack of focus on Total Program Cost, over-emphasis on initial acquisition cost

Not accounting for Cost Impact of Operational Decisions (i.e. - Developing a solution that requires extensive end-user software licensing, without budgeting for required licenses).

Failure to Achieve Best Terms and Conditions because Agreement struck before Contracting Officer/SME support was requested.

Failure to Accommodate Future End-User Requirements

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Final Plan and Cost Estimate Review / Analysis Cost Model

Process

The Team Approach to IT Program Cost Estimating and IGCEs helps ensure that all costs are identified and planned for by functional experts.

Developing an Initial Estimate with identified operational parameters enables analysis, what-ifs, trade-off discussions, and consensus building.

The process drives us to greater overall accuracy and more clarity and fidelity of data and TCO/LCC.

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Planning & Initial Cost Estimate

Execute




Planning & Initial Cost Estimate

Engage the Team via a Kick-off Meeting Establish Roles, responsibilities and Firm Deadlines PM & Technical Team develop initial high-level approach, with

enough detail for finance and contracts to begin efforts. Develop initial Cost Estimate, Compare to Budget, Identify

Cost Drivers & Key Sensitivities Establish initial Contract Plan/Approach

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Final Plan and Cost Estimate Review / Analysis Cost ModelPlanning &

Initial Cost EstimateExecute




Cost Model

Develop a Cost Model Utilizing TCO/LCC Approach Group Costs into Categories, arrange Vertically

– Direct Acquisition Costs– On-Going Services Costs– Indirect Acquisition Costs– Infrastructure Costs– Operations & Maintenance (O&M) Costs

Establish Timeframe, with a separate column for each program year. Subtotals by Category and Year Utilize Net Present Value Analysis if appropriate

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Example

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Acquisition Year Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total

Direct Acquisition Costs

Hardware $2,450,000 $1,500,000 $3,950,000Software $2,800,000 $1,200,000 $4,000,000Implementation Services $400,000 $200,000 $600,000Hardware Maintenance $122,500 $128,625 $135,056 $141,809 $223,899 $235,094 $246,849 $259,191 $272,151 $1,765,174Software Support $560,000 $800,000 $824,000 $848,720 $874,182 $900,407 $927,419 $955,242 $983,899 $1,013,416 $8,687,285Other * $50,000 $50,000

$6,260,000 $2,322,500 $952,625 $983,776 $2,515,991 $1,124,306 $1,162,513 $1,202,091 $1,243,090 $1,285,567 $19,052,459

Ongoing Services Costs

Contractor Support $120,000 $80,000 $82,000 $84,050 $86,151 $88,305 $90,513 $92,776 $95,095 $97,472 $916,362Consulting/Tuning $750,000 $50,000 $51,250 $52,531 $53,844 $55,190 $56,570 $57,984 $59,434 $60,920 $1,247,723Service Agreements $100,000 $100,000 $102,500 $105,063 $107,690 $110,382 $113,142 $115,971 $118,870 $121,842 $1,095,460Subscriptions $10,000 $10,000 $10,250 $10,506 $10,769 $11,038 $11,314 $11,597 $11,887 $12,184 $109,545Other * $1,200 $2,400 $3,600

$981,200 $240,000 $248,400 $252,150 $258,454 $264,915 $271,539 $278,328 $285,286 $292,418 $3,372,690

Indirect Acquisition Costs

Acquisition Team Labor Costs $180,000 $70,000 $25,000 $275,000Acquisition Other Costs $30,000 $5,000 $35,000Contracts/Management $40,000 $20,000 $20,500 $21,013 $21,538 $22,076 $22,628 $23,194 $23,774 $24,368 $239,091Other * $0

$250,000 $90,000 $20,500 $21,013 $51,538 $22,076 $22,628 $23,194 $23,774 $24,368 $549,091

Infrastructure Costs

Facilities $1,000,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $2,080,000Utilities $85,000 $87,125 $89,303 $91,536 $93,824 $96,170 $98,574 $101,038 $103,564 $106,153 $952,287Network $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $1,200,000Subscriptions $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $50,000Insurance $17,000 $17,765 $18,564 $19,399 $20,272 $21,184 $22,137 $23,133 $24,174 $25,262 $208,890Other * $65,000 $65,000

$1,227,000 $414,890 $352,867 $355,935 $359,096 $362,354 $365,711 $369,171 $372,738 $376,415 $4,556,177

O&M/Sustainment Costs

Upgrades/Updates $25,000 $20,000 $45,000Technical Support Personnel $20,000 $20,500 $21,013 $21,538 $22,076 $22,628 $23,194 $23,774 $24,368 $24,977 $224,068Technical Support Contractors $110,000 $112,750 $115,569 $118,458 $121,419 $124,454 $127,565 $130,754 $134,023 $137,374 $1,232,366Management $150,000 $153,750 $157,594 $161,534 $165,572 $169,711 $173,954 $178,303 $182,761 $187,330 $1,680,509Spares $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000 $475,000Tech Data/Manuals $25,000 $35,000 $35,000 $35,000 $35,000 $165,000Support Equipment $180,000 $120,000 $300,000Training $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $250,000Other * $50,000 $62,000 $112,000

$585,000 $367,000 $389,176 $366,530 $534,067 $473,793 $439,713 $417,831 $466,152 $444,681 $4,483,943

Total Cost/Year $9,303,200 $3,434,390 $1,963,568 $1,979,404 $3,719,146 $2,247,444 $2,262,104 $2,290,615 $2,391,040 $2,423,449 $32,014,360

5.0% $20,399,708OK $19,124,697 $27,382,069

Total O&M/Sustainment Costs

10 Year NPV5 Year NPV

5 Year Raw Cost

Total Direct Acquisition Costs

Total Ongoing Services Costs

Total Indirect Acquisition Costs

Total Infrastructure Costs

Cost Model




Review & Analysis

Compare Direct Acquisition Cost to Budget Compare TCO/LCC to Budget/Projections (if available) Make Cost/Benefit, Design-to-Cost, Timing, Requirements,

and other Program and Operational Decisions in light of Cost impact on Budget

Use TCO Model to Perform Sensitivity Analysis Include both Acquisition Cost and TCO Impacts in Program

Decisions

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Final Plan & Cost Estimate

Determine all Cost/Benefit Trade-offs Identify Final Draft Cost Target, including;

– Identify Cost Drivers and Decisions Made– Identify Trade-offs Incorporated– Identify Technical and Ops Decisions and the Cost Impacts– Identify Contract Assumptions and Impacts

Document Strategy and Approaches Taken Obtain Team Consensus on Technical Approach, Assumptions and Cost Establish Formal Program IGCE

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Execute to Plan, Revise as Needed

Utilize IGCE/TCO/LCC Model as Program Baseline - “What Gets Measured, Gets Managed”

Measure Cost Performance Against Baseline, update as needed– Identify changes to Cost Driver assumptions– Identify changes to Trade-offs – Identify changes to Technical and Operational Decisions– Identify changes to Contract Assumptions

Refresh Cost Estimate (TCO) for changes. The Program Cost Estimate is a Living Document!

Maintain Formal Program LCCE/TCO Estimate

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Resources on ESI Web Site

Best Value Toolkit (oriented for COTS Software Procurement)– Best Value Price Factors Guide– Best Value Terms and Conditions Guide– TCO Workbook

White Paper on IT Pricing Best Practices (forthcoming) SaaS Toolkit

– SaaS Cost Analysis Tools Cloud Negotiations White Paper

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Questions?

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Continuous Learning Points (CLPs)

For Continuous Learning Points (CLPs), please email: Bruce Whiteman ([email protected]) and provide contact data (Please include: Full Name, Rank if Applicable, Email Address, and Primary Phone Number), which course you participated in(Commercial Best Practices for IT Pricing Adapted to DON/DoD), and date/time of the course

Subj: Request for Continuous Learning Points for: Commercial Best Practices for IT Pricing Adapted to DON/DoD, Presented May 15, 2013.

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DON IT/C YBERSPACE E FFICIENCIES E NTERPRISE A RCHITECTURE E MERGING T ECHNOLOGY E NTERPRISE C...

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