Commercial Best Practices for IT Pricing Adapted to DON/ DoD

1. 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, 2013 DCO URL: https://connectcol.dco.dod.mil/itpricing15may2013v1 Dial Up: 1-866-783-7350; passcode: 6928919#

2. Continuous Learning Points (CLPs) • You must have signed in DCO for this course • Please email - Bruce Whiteman : (david.whiteman.ctr@navy.mil) 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

3. 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

4. Introduction Today’s Presenter: John Zettler Pricing/Costing SME BuySide Partners (Contractor Support to DoD ESI) 33 Years Cost/Price/Financial Experience

5. Total Cost of Ownership (TCO) Example – Smart Phone

6. Focus of TCO Example Acquisition Cost (NR- Non-Recurring) is only one element of the Total Program Cost. Looking at the Total Cost of Ownership (TCO) / Life Cycle Cost (LCC) is the Best Method to Determine: • Affordability • Budgetary Requirements • Best Value

7. IT Market Data – Spending by Category

8. IT Market Data – Spending by Category • IT services spending include costs such as: • Professional Services • Hardware Maintenance • Software Maintenance and Support • Software Assurance Initial Acquisition Costs (Hardware and Software) comprise less than 50% of annual IT spending.

9. Team Approach

10. 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

11. 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).

12. 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

13. Process Execute • 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. Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

14. Planning & Initial Cost Estimate Execute • 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 Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

15. Cost Model Execute • 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 Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

16. Cost Model Example

17. Review & Analysis Execute • 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 Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

18. Final Plan & Cost Estimate Execute • 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 Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

19. Execute to Plan, Revise as Needed Execute • 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 Planning & Initial Cost Estimate Cost Model Review / Analysis Final Plan and Cost Estimate

20. 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

21. Questions?

22. Continuous Learning Points (CLPs) • For Continuous Learning Points (CLPs), please email: Bruce Whiteman (david.whiteman.ctr@navy.mil) 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 courseSubj: Request for Continuous Learning Points for: Commercial Best Practices for IT Pricing Adapted to DON/DoD,Presented May 15, 2013.