January 2020
• Develop models based on the integrated risk management (IRM) methodology where Monte Carlo risk simulation methods will be employed to analyze risks and uncertainties in the portfolio’s inputs. • Optimize the portfolio of options (i.e., given a set of projects, programs, acquisition, or capability options with different costs, benefits, capabilities, and uncertainties, models help identifywhich programs or capabilities should be chosen given constraints in budget, schedule, and capability requirements). • Consider various viewpoints from different stakeholders including Navy leadership, field commanders, technical engineering, and economic and strategic points of view. Consider that, to maintain a high level of competitiveness, corporations in the private sector need to continually invest in technology, research and development (R&D), and other capital investment projects. But resource constraints require organizations to strategically allocate resources to a subset of possible projects. A variety of tools and methods can be used to select the optimal set of technology projects. However, these methods are applicable only when projects are independent and are evaluated in a common funding cycle. When projects are interdependent, the complexity of optimizing even a moderate number of projects over a small number of objectives and constraints can become overwhelming. Dickinson, Thornton, and Graves (2001) presented a model developed for the Boeing Company in Seattle to optimize a portfolio of product development improvement projects. The authors illustrated how a dependency matrix (modeling of interdependencies among projects) is applied in a nonlinear integer programming methodology to optimize project selection. The model also balances risk, overall objectives, and the cost and benefit of the entire portfolio. Once the optimum strategy is identifed, the model enables the team to quickly quantify and evaluate small changes to the portfolio. In theU.S. military context, risk analysis, real options analysis, and portfolio optimization techniques enable a new way of approaching the problems of estimating ROI and the risk value of various strategic real options. There aremanyDoD requirements for usingmore advanced analytical techniques. For instance, the Clinger-Cohen Act of 1996 mandates the use of portfolio management for all federal agencies. The General Accounting Ofce’s 1997 report entitled Assessing Risks and Returns: AGuide for Evaluating Federal Agencies’ IT Investment Decision-Making requires that IT investments apply ROI measures. DoD Directive (DoDD) 8115.01 mandates the use of performance metrics based on outputs, with ROI analysis required for all
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Defense ARJ, January 2020, Vol. 27No. 1 : 60-107
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