Risk-based ROI, capital budgeting, and portfolio optimization in the Department of Defense

Abstract

This article shows a reusable, extensible, adaptable, and comprehensive advanced analytical modeling process to help the U.S. Department of Defense (DoD) with risk-based capital budgeting and optimizing of acquisition and program portfolios with multiple stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The article covers traditional capital budgeting methodologies in industry and explains how these methods can be applied in the DoD by using DoD-centric, noneconomic, logistic, readiness, capabilities, and requirements variables. Portfolio optimization for the purposes of selecting the best combination of programs and capabilities is also addressed, as are alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. Finally, an illustration from the Program Executive Office Integrated Warfare Systems (PEO-IWS) and Naval Sea Systems Command (NAVSEA) showcases the methodology’s application in developing a comprehensive and analytically robust case study that senior leadership at the DoD may utilize to make optimal decisions.