Defense Acquisition Research Journal #91

Risk-Based ROI, Capital Budgeting, and Portfolio Optimization in the Department of Defense https://www.dau.edu

The United States Department of Defense (DoD) is always looking for better, theoretically justifiable, and quantitatively rigorous analytical methods for capital budgeting and portfolio optimization. Specific interest lies in how to identify and quantify the value of each program to themilitary and optimally select the correct mix of programs, systems, and capabilities that maximizes some military “value” (strategic, operational, economic) while subject to budgetary, cost, schedule, and risk constraints. This research applies some private-sector and industry common practices coupled with advanced analytical methods and models to help create these methodologies. However, the uniqueness of the DoD requires that additional work be done to determine the concept of value to the military while considering competing stakeholders’ needs.We still need a defensible, quantitatively robust concept of military value to use in the modeling. The purpose of this research is to illustrate and recommend approaches of modeling methodology and development of military value metrics, and how to combine them into a defensible, reusable, extensible, and practical approach within portfolios of programs.

This research specifically showcases how capital budgeting and portfolio optimization methods can be applied in the U.S. Navy as well as across the DoD in general, where multiple stakeholders (e.g., Office of the

Secretary of Defense, Office of the Chief of Naval Operations, C o n g r e s s) h a v e t h e i r own specif ic objectives, constraints, or domain requirements.Objectives, for example, might be capability, efficiency, cost effectiveness, competitiveness, or lethality;

while constraints might include time, budget, schedule, manpower, or policy objectives. Domain requirements could mean balancing the needs of anti- submarinewarfare, anti-aircraft warfare, or missile defense.

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Defense ARJ, January 2020, Vol. 27No. 1 : 60-107

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