AN INCREASED ROLE FOR THE YOUNGER OFFICER

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00780R003400060038-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 14, 2016
• Document Release Date: March 25, 2003
• Sequence Number: 38
• Publication Date: April 27, 1970
• Content Type: MF

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MEMORANDUM FOR: Deputy Director for Support
SUBJECT : An Increased Role for the Younger Officer
REFERENCE : DDS 70-1632, dtd 21 April 1970
SUBJ: Management Advisory Group Paper:
"An Increased Role for the Younger Officer"
2 7 APR 1970
25X1
1. There is no question that the talents, ideas and enthusiasm of our
younger officers can and should be fully used, both to our benefit and their
development. We have been doing this to an increasing extent within the
Office of Communications on both a formal and informal basis. I am of the
opinion we can expand the opportunity to participate still further.
2. At the present time we are using the young officers in our
Career Development Program several ways. First as a forum for exploring
various aspects of our communications responsibilities, particularly in the
management fields. The Chief of our Management and Training Staff conducts these
informal sessions periodically and has informed me that they are extremely
worth-while. I have personally attended such sessions and have been impressed
with the enthusiasm of these young professionals and their eagerness to partic-
ipate. Secondly, as part of their overall training, they have been given
assignments to review specific projects, programs, or procedures and originate
new proposals and ideas. I am attaching one such document prepared in early
1968 for your perusal. It is entitled, "A Working Guide To Cost Analysis".
3. We are, on a selective basis, assigning promising young officers to
positions where they can be broadened, and at the same time make positive
contributions. These assignments cut across the board in OC. One such
position is on my immediate staff and the incumbent is rotated at about
12 month intervals to make maximum use of the opportunities this assignment
affords. The position includes the responsibility for reviewing and
recommending action to be taken on all suggestion awards received by the
Office.
4. We have been using several of our younger professionals as a bridge
between senior management and the employee. While this approach represents
the informal organization at work, I have found this channel to be most
successful in determining new approaches to problems and as a communications
channel between myself and the younger engineers and professionals. For
example, in his early thirties is a natural "bridge" between
the D/CO and the young engineers.
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SUBJECT: An Increased Role for the Younger Officer
A. Suggestion Awards Panel: As indicated above, responsibility
for Suggestion Awards rests with a mid-career level communications
officer now. I plan to expand membership on this panel by two v
additional young officers.
B. Career Development Advisory Panel: I believe there are many
aspects in the career development field which could be addressed
by a group which includes the younger officers. Career Training
programs, assessment testing, evaluations and evaluation criteria
are but a few. I plan to establish such a panel under the guidance
of our Career Management and Training Staff.
C. Honor & Merit Awards and QSI Panel: A significant number of
recommendations for awards and quality Step Increases are received
by OC each month. I propose to establish a panel with the
responsibility for reviewing and processing these recommendations.
Participation by young officers would challenge their judgement
and permit them to contribute directly in the recognition of
their contemporaries. I would suggest that a similar panel
might be appropriate at the DDS level.
D. Administrative Support Panel: I am of the opinion that a panel,
constituted to review the "why", "what" and "how" we are doing in
the multi-faceted field cf administration would be extremely
desirable. Here is a natural group for younger officers to
participate and contribute. I am having our Chief, Administrative
Staff explore the possible organization and responsibilities of
this panel as well as its relationship to the Branches within the
Staff.
5. We have used junior officers on our promotion panels very
effectively. I would conservatively estimate that 200 young professionals
participate on these panels each year under the guidance of more senior
officers.
6. Other activities within OC which would permit us to make greater
use of younger officers include, but are not restricted to, the following:
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SUBJECT: An Increased Role for the Younger Officer
7. I expect to have the above panels in operation within the next
90 days. Time will be required to establish working procedures prior
to implementation and to determine panel membership.
8. While I agree with the MAG, that not all young officers can be
a part of the decision processes, the steps we propose to take will expand
the existing opportunities for their participation and contribution.
I am optimistic that the steps set forth, and others we shall consider,
will result in both immediate and long range benefits to this Office and
the Directorate.
25X1
Attachment:
Working Guide
-3-
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A WORKING GUIDE TO COST ANALYSIS
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This paper was written for use by personnel who are engaged
in the comparison and evaluation of proposed staff communications
systems. It attempts to outline the purpose and techniques of
cost effectiveness analyses as they were developed in the Depart-
ment of Defense and as they are now used throughout the govern-
ment. The thoughts in the paper are a synopsis of the best
thoughts of several authors, including a former Secretary of
Defense, a former Assistant Secretary of Defense, and a former
president of the RAND Corporation.
The material in this paper is by no means a "recipe" for
doing cost-effectiveness studies, although a sample format is
included in the appendix. Two questions are answered, in a very
general, narrative way: (1) What is a cost-effectiveness study?
and (2) How is it done? Because the rules are unwritten and
very flexible, Question (2) is answered more by example than by
attempting to build a rigid, step-by-step procedure. A knowledge
of cost-effectiveness techniques implies familiarity with a con-
cept, rather than a methodical system of solution.
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TABLE OF CONTENTS
Chapter I: BACKGROUND INFORMATION
1.1 Planning-Programming Budgeting 1-1
1.2 Definition of Terms 1-2
1.3 The Prupose of Cost-Effectiveness Study 1-2
1.4 Conceptual Approaches 1-3
Chapter II: FIXED REQUIREMENTS; COST ANALYSES OF
ALTERNATIVES
2.1 Establishing Requirements 2-1
2.2 Determining Suitable Alternatives 2-3
2.3 The Cost Analyses. 2-3
2.4 Uncertainties and Assumptions 2-5
2.5 Comparison of Alternatives 2-6
Chapter III: FIXED BUDGET; UTILITY ANALYSES OF
ALTERNATIVES
3.1 Specification of Budget Level 3-1
3.2 Alternatives 3-1
3.3 Computation of Output - 3-2
3.4 Comparison of Alternatives 3-2
Chapter IV: MISCELLANEOUS CONSIDERATIONS
4.1 Fixed and Variable Parameters 4-1
4.2 Treatment of Uncertainty 4-2
4.3 Spillovers 4-4
4.4 . Siib-optimizations 4-5
APPENDIX I: SAMPLE FORMAT FOR FIXED-UTILITY 5-1
COST-EFFECTIVENESS STUDY
BIBLIOGRAPHY 6-1
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CHAPTER I
BACKGROUND INFORMATION
1.1 PLANNING - PROGRAMMING - BUDGETING
On 25 August 1965, President Johnson directed the imple-
mentation of the Planning-Programming-Budgeting System (PPBS)
of fiscal control among all agencies and departments of the
United States Government. The system had been introduced
into the Department of Defense by Secretary McNamara in 1961
and was generally regarded as efficient, effective, and a
great improvement over previous Defense planning and budget-
ary practices. President Johnson believed that the same
methods were applicable to the entire government and would
correct the obvious deficiencies of the federal budgeting
system then in use.
The old concept of budget planning entailed submission,
by each agency, of a proposed list of expenditures for the
coming year. The expenditures were listed in "line item"
form, i.e., personnel, maintenance, construction, R&D, pro-
curement, etc., effectively obscuring the overall goals or
programs of each agency. The old system also failed to in-
spire creative long-term planning and allowed wasteful dup-
lication of effort between "competing" agencies. And;
finally, it failed to allow top officials sufficient time
to review, evaluate, and make decisions. Because of the
human proclivity for proc astination, annual budget sub-
missions were one-shot affairs involving "go, no-go" deci-
sions as well as hasty cost estimates.
PPBS is designed to eliminate the shortcomings of the
old budgetary system by strengthening the weak link between
planning and budgeting. Under PPBS, all agencies are re-
quired to submit a 5-year plan to the Bureau of the Budget
(BOB) annually. The 5-Year Program Call is broken down by
program category rather than by budgetary line item. In
addition to a description of current andproposed programs,
the Program Call includes the financial and manpower
schedules for the next five years. As the proposed program
initiation date approaches, the system may be modified, ex-
panded or deleted by changing it in the annual Combined
Program Call. Access to the long-range goals of all agencies
has allowed the BOB to formulate a clearer set of national
objectives and reduce the duplication of effort between agen-
cies.
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PPBS is a tool used primarily in the top levels of
government; however, the effects of the system reach deeply
into every agency. The Combined Program Call must describe
each proposed system, the alternatives, and some sound and
logical evidence showing the greater effectiveness and effi-
ciency of the chosen proposal. This last requirement
represents many man-hours of labor doing cost-effectiveness
studies, which is the subject of this paper.
102 DEFINITION OF TERMS
The terms "cost-effectiveness study", "cost-benefit
analyses", "cost-utility analyses", "systems analyses", and
"operations research" are used synonmously throughout the
government to denote the dialectic process used by all gov-
ernment agencies to give the U. S. citizen the most for his
tax dollar. Although the terms actually have slightly dif-
ferent meanings, they all denote the quantitative comparison
of inputs (costs) and outputs (gains) of alternative systems.
designed to accomplish the same task. "Operations research"
was coined by the tactical planners of World War II as they
used the system to determine optimum troop developments in
the pursuit of rather flexible goals. In a non-military
context, the term alludes to the optimization of a single
system described by many variable parameters, and is closely
akin to the "systems analyses" used at the higher levels of
government. Operations research and systems analyses sur-
pass cost-benefit analyses in scope because the former in-
clude constant system revision (and occasional restatement
of objectives) in search of the optimum, while cost-benefit
analyses generally denote efficiency, effectiveness, and
economy comparisons between a fixed number of proposed
systems. The terms cost-effectiveness, cost-utility, and
cost-benefit are. almost exactly synonomous; cost-effective-
ness and cost-utility are generally applied to government
systems because the "benefits" are not as readily apparent
as are the profits of industry. As mentioned, the various
terms are used interchangeably by all but the strict econo-
mist, and they will be used interchangeably in this paper.
103 THE PURPOSE OF COST-EFFECTIVENESS STUDIES
PPBS and especially the cost-effectiveness approach to
decision making is an extremely controversial subject among
government managers. The technique is praised by many and
condemned by others. Among the latter group is Admiral H. G.
Rickover, who emphatically disagreed with Secretary McNamara's
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decision, on a cost-effectiveness basis, to continue produc-
tion of conventionally-fueled aircraft carriers rather than
use nuclear power. The basis of Rickover's argument was
his contention that a cost-effectiveness study has little
validity because it ignores intangible factors, or at least
over-emphasizes numerical dataa~ Such criticism comes from
many sources and is often justified. However, there are two
points dealing with the limitations of cost-effectiveness
studies which partially refute Rickover's argument; (1) Accord-
ing to the people who established such procedures in the Depart-
ment of Defense, a cost-effectiveness study is incomplete
until the pertinent intangibles have been outlined and dis-
cussed as thoroughly as the quantitative parameters; and, (2)
The primary purpose of a cost-effectiveness study is to
sharpen the intuition and judgment of the decision-maker.
The study is but one factor which should be considered, Many
decisions have been made which are non-cost-effective on paper
but are extremely political-effective in practice. Regardless
of its true worth, a well-done cost-effectiveness analyses of
a proposed system (and its alternatives) will be a big help
in selling the system to PPBS and BOB officials.
1.4 CONCEPTUAL APPROACHES
Exactly how are the relative merits of two or more systems
compared on a cost-effectiveness basis? Many well-intentioned
people say that the optimum system will maximize the benefits
(effectiveness) available and minimize the costs incurred, A
little thought shows that such a criterion is impossible;
maximum effectiveness is inconceivably large and minimum cost
is zero. To put it another way: It is often possible to find
a new system B which will do more at less cost than the old
system A; however, it is always possible to find a third system
C which will do more than either A or B, and a fourth system D
which will cost less than A, B, or Co A systems analyst
attempting to simultaneously maximize benefits and minimize
costs will soon realize that he must place some constraints
on his criteria,
The generally accepted method of cost-effective choice
requires that the analyst determine the system which will maxi-
mize the benefits obtained minus the cost incurred. In the
business world, benefits an costs are usually expressed ex-
clusively in terms of dollars, and the objective of the cost-
effectiveness study becomes the maximization of profit. The
government, however, does not make a monetary profit - it pro-
vides a service to the taxpayer. As such, the benefits and
costs of a system are incommensurable, and the merit of X capa-
bilities minus 100 million dollars compared with the merit of
Y capabilities minus SO million dollars is meaningless.
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A seemingly -logical modification of the base criterion
outlined in the previous paragraph overcomes the measurements
problem but has limited application. An analyst using this
conceptual approach postulates that the-optimum system is the
one having the highest benefit-to-cost ratio, assuming that
all benefits are commensurable or that one benefit carries
much more weight than the otherso_\Such an assumption may or
may not be valid. The ratio approach in its entirety is valid
only when the abso~ute magnitude of cost or benefit is immaterial.
It assumes that a system costing X dollars and having Y capa-
bilities is the exact equal of a system costing 2X dollars and
having 2Y capabilities. In the real world, quantitative re-
quirements and budget dollars available are very much factors
to be considered, and the ratio approach has little value un-
less definite constraints are specified. Fixing the level of
cost or benefits reduces the ratio approach to one of the two
procedures which will be the subject of the remainddr of this
paper. The first approach requires that all alternative systems
achieve or surpass. certain specified goals (outputs); whichever
system requires the least input is the optimum solution, The
second approach is used when the inputs (budget dollars) are
specified; the optimum system is the one yielding the greatest
return.
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CHAPTER II
FIXED REQUIREMENTS, COST-ANALYSES OF ALTERNATIVES
2,1 ESTABLISHING REQUIREMENTS
In the "fixed requirements" approach, the analyst works
with a pre-determined level of utility to be obtained in the
accomplishment of some given objective, and his task is to
determine the alternative (or feasible combination of alter-
natives) likely to achieve the specified level of utility at
the lowest economic cost. Very often, the level of utility
will be specified by higher authority and the analyses reduces
to a comparison of alternative system costs. On the other
hand, an exact level of utility is difficult to specify when
the proposed system is only a concept, and the analyst may
find himself working against a vague set of long-range objec-
tives. If such is the case, the largest part of the analyst's
job may be transforming "goals" into a firm set of quantita-
tive requirements.
The first part of the formal study is, logically, a clear,
concise, and quantitative statement of the attributes required
of all alternatives. Any correspondence between the specified
requirements and organizational objectives at all levels should
be emphasized. Again, the requirements must be specific and,
if at all possible, gpantitative0 An adverse indication of
how well the requirements are written may be obtained by count-
ing the number of superlatives used, "Most", "least", "best",
"highest" and other glorious but useless words have no place
in the requirements section of a fixed-utility cost-effective-
ness study.
The search for quantitative requirements is complicated
by a need for accuracy. The choice and level of a requirement
is fundamental e if it is incorrectly specified, the whole
analyses is addressed to the wrong question. Consider the
effect of over-estimating required system capacity. The truly
cost-effective system (under actual conditions) may well be
eliminated from the proposed list of alternatives with no
cost analyses whatever. The danger of incorrectly specifying
a requirement is greater when one of the alternatives is a
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brain child or favorite of the analyst; he may unconsciously
"hedge" the requirements in favor of his project.1
Another facet of the specifications problem is the time
dependency of many requirements, especially those dealing
with expanding system capadities. If the required system
capacity is expected to increase continuously throughout the
years, any system designed to meet the requirement at the
end of the time span will automatically meet the requirement
during the preceding years. However, the most economical
alternative may very well be the one which meets the require-
ment on a year-to-year basis by incrementally expanding the
system capacity. If the system lends itself to such incre-
mental expansion, a year-by-year forecast of the increasing
requirements is basic to the study. Such predictions may be
based on intuition, long-range plans, or past history, depend-
ing on the type of system and the depth of the analyses, If
the alternatives are compact, unitized systems, incremental
expansion is precluded and the design goal must be the capa-
city requirements predicted for the end of the time span.
Although the surplus capacity created during the first few
years of its useful life is wasted, the unitized system may
still be most economical.
The schedule for installation and operation of a new
system may be another major consideration. Many proposed
systems are designed to replace existing systems which are
being obsoleted by newer and more economical state-of-the-
art components. One requirement of all such systems is that
there be no interruption of service during system change-over.
Because of this, a complex system must be phased in a sub-
system at a time, and should be available from the manufac-
turer on that basis.
Cost-effectiveness techniques may be used in an infinite
number of situations, each situation requiring different
effectiveness yardsticks. No one person could catalog all
the output parameters which could possibly be used to describe
a communications-system, and the short list compiled at the
lAn excellent example of a hypothetical Defense Depart-
ment systems analyses based on improperly specified require-
ments may be found in Appendix II of Tucker's A Modern Design
for Defense Decision, a McNamara-Hitch-Enthoven Ant ology,
Industrial College of the Armed Forces, Washington, D. Co, 1966.
The article, entitled "An Illustrative Example of Systems Analy-
ses", was prepared for instructional use at the United States
Military Academy at West Point and is well worth reading for
any potential systems analyst.
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end of this chapter is intended only as a reminder and
guide.
2.2 DETERMINING SUITABLE ALTERNATIVES
Once the analyst has determined what his final system
is required to do, he must make a search for candidates.
Usually, one particular system has already been studies and
may have generated the request for a cost-effectiveness
study. Also, most new'.systems are replacements for existing
systems and must be proven more cost-effective than the ori-
ginal system. If the effectiveness of the original system
(after modification) will meet the new requirements, it
should be considered the baseline alternative. Many analyses
will contain only these two - the original and a proposal,
while other studies compare a large number of alternative sys-
tems or a single system having continuously variable input
parameters. The "tradeoffs" possible in this latter type of
analysis effectively create an infinite number of alternatives.
The great problem in choosing alternatives to compare is to be
sure that all alternatives have been included, since the optimum
system may well be a combination of two or more original alter-
natives. Frequently, the analyst lacks the imagination to mix
alternatives at the beginning of the analysis and the optimum
solution is not even considered until he is well into the prob-
lem. The invention of better systems in this fashion has been
lauded as one of the principal payoffs of systems analyses.
Although consideration of any proposal as a system alter-
native should be ipso facto evidence of requirements met, the
outputs of some systems must be calculated and shown in the
analyses, simply to prove.the eligibility of the system to the
reader. However, maximum output is not a criterion in the
fixed-utility approach and no effort need be wasted detailing
system outputs if it is evident that the stated requirements
are met.
2.3 THE COST ANALYSES
The cost analyses portions of a cost-effectiveness study
do not necessarily involve money. During wartime, many re-
sources are put on a "critical materials" list and become
valuable because of their scarcity; their dollar values are
essentially meaningless. Another "cost" which is occasionally
used in an analysis without reference to money is manhours of
labor. A fixed-utility cost-effectiveness study using labor
as its only cost becomes a time-and-motion study. However, a
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system using both critical materials and manhours of labor as
costs cannot be analyzed until a common denominator is found
for the inputs. Although far from perfect, the almost un-
limited possibilities of substitution in our 'economy make dollar
costs a satisfactory measure in most cases. In any long-range
program involving R&D and procurement, dollar measurements are
far superior to any practical alternative.
Before a comparison of alternative system costs can be
made, the analyst must determine the most useful and informa-
tive cost breakdown. As mentioned previously, complex systems
are generally installed over a span of years, and the yearly
costs are of prime importance in budget planning. For this
reason, a year-by-year cost analysis over the time span of the
study is required. Care must be exercised in choosing the,time
span, also, since R&D and procurement costs are much higher
during the first years of a new system. If system costs are
not projected far enough into the future, the overall economy
of a new system in comparison with an existing system may not
be evident.
The actual category of cost may follow along either an
objective or a functional approach. In those systems which are
phased in a function at a time, both breakdowns may be required.
An objective breakdown is required for budgetary purposes, since
Congress is always interested in the money spent on R&D, procure-
ment, installations, training, equipment replacement, personnel,
etc. A functional breakdown is an extension of the "PPBS" con-
cept to lower levels of planning. It is particularly applicable
to complex systems containing several subsystems which are pro-
curred and installed in successive stages. The cost breakdown
by-function allows the system engineer to eliminate those func-
tions which can be performed more economically by the existing
system or a third alternative, providing that all proposals
follow the same functional breakdown. It also provides some
indication of the effect of program revision or cancellation at
a later date.
One mistake that is frequently made in cost analyses is
the inclusion of "sunk" costs in the total cost of an alterna-
tive. Sunk costs are those which ae non-recoverable regardless
of which alternative is chosen. The cost of a "feasibility
study" prior to the selection of a new system represents money
spent and not retrievable, regardless of how feasible the pro-
posed system turns out to be. Another example of sunk costs
is the R&D expenses of equipment originally developed for an-
other system. Any cost which still exists after all propos-als
have been discarded cannot be considered attributable to any
particular alternative.
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Another cost mentioned in the literature and frequently
ignored by the analyst is the "salvage" value of the system
at the end of the time span selected-for the study. The sal-
vage value is often ignored'by postulating that the equipment
involved will deteriorate or become obsolete at a rate which
will cause the utility of the system to approach zero at the
end of the study. If such is the case, the salvage value is
reduced to the "used hardware" value of the equipment, which
is probably negligible when compared with R&D, procurement, and
annual operating costs, If the salvage value cannot be ignored,
it appears as a "negative" cost of the alternative and must be
subtracted from the total system cost
The complexity of the actual cost computations depends
largely on the size and complexity of the system. Some simple
system alternatives may be described solely on-the=basis of the
cost estimates found in?theccontractor's proposal. Larger sys-
tems, however, have constantly fluctuating requirements, and
the most economical alternative may be the one which adjusts to
meet the requirements on a year-to-year basis. The annual costs
of such a system will generally follow the annual ooutput, and
the correlation between predicted capacity requirements and in-
put dollars must be found. The relationship between input and
output is referred to as a "model" in many systems analyses
texts. Depending on the complexity of the system and the depth
of the analysis, the model may vary from a simple output volume/
input dollars ratio to an assortment of graphical displays and
mathematical formulas containing numerous parameters. Of course,
the model need not be the same for all alternatives, since only
the end result is fixed; the method of achieving the end results
is unrestricted. Regardless of what form it takes, the model
will allow the analyst to predict (1) future system costs based
on future requirements and (2) the relationship between current
costs and outputs.
Although the actual yearly breakdowns are required for
budgetary planning, cost comparison of alternatives is diffi-
cult on that basis; the high R&D costs of a new system may be
balanced by lower operating costs in the later years of the
study, making the total cost less than the old system's. Be-
cause of this, the costs section of each alternative should
show the actual yearly breakdown, the total cost of the system,
and the average yearly cost (less salvage cost, if appl icable)o
204 UNCERTAINTIES AND ASSUMPTIONS
As the study progresses, the analyst is likely to find
the number and range of the parameters increasing rapidly.
To keep the study from hopelessly floundering, the analyst
must (1) keep an outline in mind similar to the one in the
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appendix; and (2) stifle the ever-increasing scope of the
problem by acknowledging the uncertain areas and making some
educated assumptions. Of course, the reliability of the study
decreases with every assumption made, but man-power and time
limitations always prevent absolute accuracy. An abbreviated
study abounding with reasonable assumptions is infinitely more
desirable than an exact study completed too late to be useful.
However, the analyst must document the uncertainties and,assump-
tions so that the decision-maker may form his own opinion of
the validity of the study. A cost-utility analysis should be
complete in itself, as should any other staff study; anything
that the analyst is called upon to explain about the analyses
should have been included in the first place. Implicit in
this statement is the requirement for mathematical clarity and
completeness in explanation of the models used.
205 COMPARISON OF ALTERNATIVES
The final step in a fixed-requirement cost-effectiveness
study is a qualitative discussion of the relative merit of
each alternative. Previous steps in the analyses must ignore
any benefits or outputs which are "above and beyond" the stated
requirements, since minimum cost is the selection criterion.
However, an output advantage of one alternative or an intangible
benefit which could not be stated as a requirement may offset a
slight cost disadvantage in the mind of the decision-maker.
Again, the purpose of a cost-effectiveness study is to sharpen
the intuition and judgment of the decision-maker. Although a
fair and complete statement of the requirements implies recom-
mendation of the cheapest alternative, a cost-effectiveness
study::is not a recommendation. It is properly found as an
attachment to a formal military staff study, which does contai*.
recommendations.
If two or three alternatives are being considered, the dis-
cussion of side benefits and intangibles may be completely
written in narrative form. As the number of alternatives is
increased, however, comparison becomes difficult unless a tabular
presentation is used. A side-by-side comparison of costs and
extra benefits, as shown in the appendix, will be very useful
to the decision-makers
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CHAPTER III
FIXED BUDGET; UTILITY-ANALYSES OF ALTERNATIVES
3.1 SPECIFICATION OF BUDGET LEVEL
The second primary approach to cost-effectiveness deter-
minations requires a knowledge of allowable system inputs
(money) over the time span of the study. Money, rather than
specified requirements, becomes the fixed parameter and system
output is the variable parameter which must be maximized, This
technique may be of some value when applied to short-range pro-
jects of limited scope, since the funds available are generally
known. In long-range, far-reaching programs, the generosity
of the BOB and the taxpayer X years hence is uncertain and de-
pendent on how critically the system is needed. Since the
fixed-budget approach sets no specific level of required system
capacity, budget people are apt to wonder if the analyst's op-
timum system is required at all; or why it can't be substantially
reduced in scope and cost. Although the usefulness of this
method in.government programs is doubtful, the procedural dif-
ferences between the two approaches is slight and will be out-
lined here for the sake of completeness.
The first step in the fixed-utility approach was the speci-
fication of quantitative requirements. In the fixed-budget
approach, the budget must be quantitatively specified by the
analyst over the time span of the study. Although a. logical
estimate of future budget levels may require less thought than
an estimate of future required system capacities, the effect of
underestimating money available may be as disastrous as over-
estimating required capacity in the fixed-utility approach. In-
accuracy may eliminate the truly cost-effective system from con-
sideration.
302 ALTERNATIVES
The search for suitable alternatives is similar to the
process described in Chapter II. The only requirement that a
candidate system must meet is that of maximum projected cost,
and proof of eligibility for consideration is necessary only
if the cost of an alternative is not readily apparent to the
reader. The existing system, if eligible, should be considered
one alternative, and the analyst.should again be alert for ad-
vantageous combinations of alternatives.
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3.3 COMPUTATION OF OUTPUT
The portion of the fixed-budget analyses which is analogous
to the costing portion of the fixed-utility analyses is the de-
termination of system output. Much the same mathematical and
graphical techniques of model building used in the fixed-utility
approach are applicable, since input/output relationships do not
depend on the method of system analyses. Cost becomes the in-
dependent variable which must be specified; output is the depen-
dent variable.'
If the proposed system has only a single output or has one
particular output which is much more important than all others,
maximization of output is a straightforward matter, However,
most systems have several output parameters of importance
capacity, speed, accuracy, etc., which are incommensurable and
not directly related. In other words, Alternative A may pro-
vide the greatest capacity for a given budget level, Alternative
B the greatest speed, and C the greatest accuracy. Unless the
relative contributions of the individual parameters to the
total worth of the system can be found, quantitative comparison
of the alternatives is blocked. The meaning of this statement
may best be demonstrated by using an example from private in-
dustry.
A factory owner is planning to redesign the assembly line
and quality control divisions of his plant and has three alter-
native systems in mind. The costs of installation and operation
is roughly the same for all three systems, and the output para-
meters of importance are capacity (number of assembly lines),
speed (of assembly), and accuracy (percentage of produced units
which are never returned due to defects).
The total worth of each alternative system may be quanti-
tatively described by the number of perfect units which could
be turned out each day if that system were selected, In this
example, the mathematical relationship of the parameters to
the total system worth is obvious - The number of perfect units
manufactured each day is the product of the number of assembly
lines, the speed of assembly in units per day, and the percent
age of units which are defect-free. If this product is computed
for each alternative, the factory owner may select the system
which will provide the greatest return for his investment,
3.4 COMPARISON OF ALTERNATIVES
Unfortunately, very few systems are simple enough to be
analyzed on a half sheet of paper. Normally, a nice, neat,
rigorous mathematical relationship between system worth and
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the individual parameters cannot be found. Frequently, the
system is so complex that the analyst cannot establish even
an empirical relationship. In such a case, about the best he
can do is investigate the tradeoffs in the hope of designing
another alternative combining all of the good points and none
of the bad points of the original alternatives. If such a
system cannot be found, the analyst can at least qualitatively
discuss the advantages and sacrifices involved in the choice
of each alternative. The final, irrevocable choice is up to
the decision-maker; but the analyst can greatly assist him with
an orderly, written presentation of fact.
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CHAPTER IV
MISCELLANEOUS CONSIDERATIONS
4.1 FIXED AND VARIABLE PARAMETERS
Throughout this paper, much effort has been expended
sidestepping any detailed discussion of the difference be-
tween optimization of variable systems and the selection of
one cost-effective system from several unique alternatives.
An attempt at clarification will be made here.
The simplest::problems involve a number of separate, un-
related proposals, where the relationship between cost and
output for each proposal is fixed and known. The specifica-
tion of output dictates the cost of an alternative, or fixing
of cost tells the analyst exactly what the output of each
alternative is. Mathematical computations are straightforward
and determination of the cost-effective alternative is auto-
matic.
Consider now the factory reorganization problem in
Chapter III. The factory manager arrived at his alternatives
by allowing himself $10,000 costs. Previous time-and-motion
studies had shown that the cost of adding another line would
be $1,000, the cost Of speeding up a line would be $20 per
day, per line for each additional unit produced, and that
quality-control costs ran about $40 for every percentage point
of perfection (per cent of units produced which were not re-
turned due to defects in manufacture). Using these costs, the
plant manager had determined three alternative ways to spend
his $10,000:
NUMBER OF
ASSEMBLY LINES
SPEED (UNITS PER
LINE PER DAY)
PER CENT
DEFECT-FREE
COST
ALTER A
1
250
100
$10,000
ALTER B
3
150
100
$10,000
ALTER C
5
100
75
$10,000
As explained in Chapter III, the total daily output is a good in-
dicator of system worth. Alternative B, since it turns out 450
units per day compared with 250 for A and 375 for C, is the cost-
effective choice.
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In its present form, the above analysis is a reasonably
simple example of a problem involving one system and several
cost-related parameters which may take on only discrete
values. Only three mathematical computations were necessary
to determine which combination of parameters yielded the
greatest return. Of course, as the parameters are allowed
to take on more values, the number of computations will in-
crease greatly. A systems analyst working on'-this system
could not be satisfied with his work unless he were free to
try other values (2, 4, 6, etc.) for the number of assembly
lines. Although Alternative B is the best choice of the three
alternatives specified, there is no guarantee that a better
combination of capacity, speed and accuracy could not be found.
Digital computers, which are ideally suited to such repetitive
calculations, may become necessary as the number and range of
parameters is increased.
When all restrictions other than cost are removed from
the above output parameters, they become continuously variable
and may generally be maximized mathematically. Two algebraic
equations govern the performance of the factory system above:
Output = x y z
Cost = $10,000 = $1,000 x + $20 y + $40 z
where x = number of assembly lines
y = assembly line speed, in units produced
per day
z = percentage of produced units which are
defect-free
If these two equations are simultaneously maximized, the maximum
system output is found to be 463 units per day, which would occur
if 3 1/3 (if such were possible) assembly lines producing 166 2/3
units per day, per line at an 83% defect-free rate were used,
No combination of parameters will give a greater output for $10,000
or less.
4.2 TREATMENT OF UNCERTAINTY
As discussed in preceding chapters, every system analysis
includes a number of intelligent prophecies and assumptive
analytical short-cuts which require detailed explanation and
justification. The introduction of such uncertainties into an
analysis is a necessary evil, since future occurrences are by
definition uncertain and manpower limitations prevent completely
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rigorous mathematical analyses. As the degree of uncertainty
surrounding the mathematical model or any of the key parameters
increases, the reliability of the final results decreases. This
may be easily demonstrated by hypothesizing a system having ten
independent parameters. If nine of the parameters are known
exactly and the tenth is estimated with an 80% probability of
being correct, the probability of all ten parameters being cor-
rect is also 80%. However, if each of the ten parameters is
estimated and has an 80% chance of being correct, the probability
of all ten parameters being correct is approximately 10% (0.810)0
If this system had been analyzed using only the one "best guess"
case, the analyst would be ignoring a set of probable occurrences
which has a 90% chance of occurring. Very few decision-makers
would wager any money on such odds.
In the interests of accuracy and credibility, therefore,
the analyst must analyze all significant and interesting con-
tingencies. Unless a great deal of judgment is used in the,
selection of contingencies for analyses, the analyst may face
an insurmountable pile of work. If there are two uncertain
factors, each of which may take on five different values, the
analyst must make 52 or 25 different calculations, which is
quite feasible with a hand calculator. However, ten uncertain
factors which are permitted five values each represent 5 or
9,765,625 different computations. Although electronic computers
could easily do the computations, no single human being could
ever compare the results. Elimination of insignificant contin-
gencies (i.e., those contingencies having very little chance of
occurring) becomes the practical problem facing the analyst.
Many chapters of many textbooks are devoted to Monte Carlo
and other gaming techniques for dealing with statistical
fluctuations of parameters. Such statistical computations are
often complicated; they usually end up as "window dressing"
which is never understood and which causes the reader to dis-
trust the entire study. However, there are twu relatively
simple standard procedures for dealing with uncertainty which
may be of considerable assistance to the analyst. The first of
these is the a Fortiori argument, which follows this line of
reasoning: Suppose two alternatives, A and B, are being con-
sidered. The analyst, using a "best guess" for one of the
parameters, has shown Alternative A to be the cost-effective
choice, but the uncertainty surrounding the indefinite para-
meter casts some doubt on the validity of his study. The
analyst will then deliberately resolve the uncertainty in
favor of Alternative B. If Alternative A still proves to be
cost-effective, all doubt is removed from the analyst's solu-
tion. If not, the analyst is no worse off than he was before.
An extension of the a Fortiori argument which is used
extensively in Defense Department Analyses is the sensitivity
analyses. Instead of using best guesses for key parameters
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exhibiting a high degree of uncertainty, the analyst will use
several values (high, medium, low) in an attempt to determine
the sensitivity of each alternative to variations df the uncer-
tain parameters. Only those parameters which significantly
affect system output need be investigated further. A high
degree of uncertainty in only one or two parameters may be
handled by presenting best, worst, and most likely solutions
to the decision-maker.
4.3 SPILLOVERS
Another mistake frequently made in cost-effectiveness
studies is the neglect of "spillover" costs. The term "spill-
over" describes the effect of a new system, operation or action
on the costs or benefits of a semingly unrelated system already
in existence. In simpler terms, a spillover cost is a detri-
mental effect not anticipated by the analyst. A classic
example involves the use of system-analyses to determine an
optimum wash-tub/rinse-tub arrangement in an Army field kitchen.
Using minimization of man-hours as his criteria, the analyst
had determined that a maximum number of mess-kits could be
cleaned in a given time if three of the four available tubs
were used for washing, and the one remaining tub was used for
rinsing. After implementation of the analyst's recommendations,
a hypothetical conversation with the mess sergeant was reported
as follows:
Yeah, I remember that guy. He had some screwball idea
that the mission of the Army was to eliminate waiting lines.
Actually I had it all figured out that two was the right
number of rinse tubs. With everyone rinsing in one tub
the bacteria count would get way past the critical level.
But we switched to one rinse tub while he was around
because the old man says he's an important scientist or
something and we got to humor him. Had damn near a third
of the outfit out with the bellyache before we got the
character off the reservation. Then we quick switched to
three rinse tubs and really made a nice line. "Nothing
like a good line ~o get the men's legs in condition,"
the old man says.
The above example illustrates spillover effects and how easily
they may be missed by the analyst.
2From A. M. Mood's Review of P. M. Morse and C. E. Kimball,
Methods of Operations Research, in the Journal of the Operations
Researc Society o America, November 19 pp. 307.
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4.4 SUB-OPTIMIZATIONS
The term "sub-optimization" appears frequently in the
literature without definition. In the interest of complete-
ness, a brief attempt at clarification will be made in this
paper.
A large corporation or government department cannot possi-
bly subject every facet of its-operation to simultaneous
analyses; the scope of the problem would be beyond the mental
capacity of any analyst. Since the validity of an analysis
depends on the analyst's ability to examine all the unsolved
problems of choice simultaneously, most complex systems must
be optimized a sub-system at a time; hence, sub-optimizations
Sub-system analyses almost necessarily follow along hierarchial
lines, with many specific decisions being made at lower levels
of authority and broader, but relatively few, decisions being
made at the highest corporate or government levels,
During his examination of a specific alternative, the
analyst may find that he must make a sub-optimization of the
alternative to determine its true merit. An extension of the
hypothetical assembly-line situation detailed earlier in this
chapter makes a good example. Assume that the factory owner
owns a second factory turning out a different but highly mar-
ketable product. The owner would like to expand his second
factory, but can raise only the $10,000 with which he is plan-
ning to modernize his first factory. If he is to make maximum
use of his available capital, the factory owner must choose
between tow alternatives: Expansion of Factory #2, or moderni-
zation of Factory #1. However,,.before he can make a choice,
he must perform a sub-analysis of one alternative - the moderni-
zation of Factory #1, as explained in the first section of this
chapter. Determining the maximum output of Factory #1 must now
be called a sub-optimization, since it involves only one alter-
native and is subordinate to the primary analysis.
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 SAMPLE FORMAT: COST-UTILITY ANALYSES; FIXED REQUIREMENTS
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Requirements and Background Information
a. Message Volume
b. Speed
c. Reliability
d. Accuracy
e. Urgency
2. Description of Alternatives
a. Existing System
b. Alternative 1
c. Alternative 2
3. Analyses of Existing System (Modified)
a. Input/output relationships (model)
b, Objective cost analysis:
(1) Research $
Development
(2) Procurement
(3) Installations
(4) Training
(5) Equipment
Maintenance
(6) Personnel
Salaries
(7) Expendable
Supplies
(8) Other
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c. Functional cost analyses:
FY69 FY70 FY71
(1) Function A
(2) Function B
(3) Function C
TOTAL
d. Salvage value
e. Average yearly system cost:
Total cost - salvage value
Time span o study (years)
f. Uncertainties encountered and assumptions made in
analyses
g. "Bonus" system benefits
4. Analyses of Alternative 1
(Repeat Step 3 for Alternative 11
5. Analyses of Alternative 2
(Repeat Step 3 for Alternative 2)
6. Comparison of Alternatives
a. Cost analyses:
(See next page for chart)
b. Conclusions
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Sample format (cont'd):
(1) Costs:
FY 69
FY 70
FY 71
FY 72
TOTAL
(2) Salvage Value
(3) Average Yearly
Cost
(4) "Bonus" Benefits
a.
b,
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1. Industrial College of the Armed Forces. A Modern Design
for Defense Decision --- A McNamara - Hitch - Ent oven Ant ol-
, edited by Samuel Tucker. Washington, C., 1966. p. 259
2. Novick, David (ed.) Program Budgeting --- Program Analysis
and the Federal Government. Cambridge: Harvard University
Press, 1965. p. 382.
3' . Hitch, Charles J., and Roland McKean, The Economics of Defense
in the Nuclear Age, Cambridge, Mass., Harvard University Press,
1960.
4. Hitch, Charles J., Decision-Making for Defense, Berkeley and
Los Angeles, California, niveristy of California Press, 1965.
p 83.
S. Subcommittee on National Security and International Operations
of The Committee on Government Operations, United States Senate,
Planning - Programming - Budgeting (Selected Comment), Washington,
C., U. S. Government Printing Office, 19b7. p. 73.
6. Miller, David W., and Starr, Martin K., Executive Decisions
and Operations Research, Englewood Cliffs, N. J., Prentice-Ha ,
nc., . p. 446.
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