Portfolio Planning Made Simple

Feature Spotlight – Negative Costs are Now Possible!

Posted by Bill Adams on 6/28/16 6:30 AM

It is now easier than ever to specify costs for your alternatives and make use of our Suggest Schedule algorithm. Find and schedule your alternatives for the best bang for your buck. Until recently, you could only specify costs as positive quantities. For example, say a project costs $1M its first year and $1.5M in the second year. You could not show that a project costs $1M its first year and saves $750k in the second year.

In the latest release, we added the ability to specify such costs. In addition, we make it simple to specify an alternative with overall negative costs. We made this specific change for the Navy because they make use of offset accounting. In offset accounting, you specify 2 types of projects: those that require new funds and those that free up money, or offsets. An offset is essentially a project or set of projects that you are willing to cancel or willing to perform at a lower resource usage. By adding the ability to natively handle offset projects, we have given the US Navy the ability to directly use our advanced algorithms to find cost savings and reallocate those savings to important new projects.

Now you have the ability to specify negative costs throughout the Allocate section of the application, including Suggest Schedule. An alternative with negative costs can be used to:

1. Specify that an alternative costs money up front, but saves money in out years (or vice-versa).
2. Make use of offset accounting: some alternatives cost money, while others (the offsets) free up money for other uses. An offset alternative is an alternative representing doing less of a project or perhaps canceling a project altogether.

Example 1: An alternative that saves money in out years.
In this example we have two alternatives with the following data:
Buy New Servers: This costs $2M this year but saves us $250k in the following year because it reduces our maintenance costs.
* Buy New Software: The new software costs us $750k in the first year with no out year costs.
* Our remaining free budget is $2.5M this year and $500k in the following year.

In this example we cannot buy new servers and buy new software in the first year (we would be $250k over budget). In addition, there is not enough liquid cash in the second year to buy new software even if we forego the buy new servers alternative. However, if we buy new servers this year it will save us $250k in the following year (leaving $750k available) and we can buy new software that year.

Example 2: Using an offset alternative.
For the sake of example, we assume a single year, no budget left to spend, and two alternatives:
* Stop Supplying Cell Phones To Employees: This alternative represents our company no longer providing employees with cell phones and would save us $200k between the cost of the phones and the cost of the service. Through our model this alternative has a score of 40%, that is providing employees with phones gives a 40% benefit score. Thus no longer providing them with phones hurts our score by 40%.
* Company Retreats: This alternative represents our company paying for a 1 week vacation for all employees to the Florida Keys. It would cost $200k and we have determined that it gives a score of 75%.

If we want to fund the company retreat alternative, we have to do the offset alternative of stop supplying cell phones to employees. Since the benefit of cell phones was determined to have a 40% score and the company retreat had a 75% score, it makes sense to make this trade off and our Suggest Schedule algorithm would suggest it.

Let us know how you are using negative cost scenarios and offset accounting to keep your business profitable and agile.

Topics: General

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