Wednesday, December 1, 2010

NMCI Economics for the Next Five Years

As of March 2008, NMCI included more than 363,000 computers, serving more than 707,000 Sailors, Marines and civilians in 620 locations in the continental United States, Hawaii, and Japan, making it the largest internal computer network in the world.*  On September 30, 2010, the NMCI contract ended and the new Continuity of Services Contract (COSC) began. Under the COSC, the Navy retains the same scope of NMCI services with HP, but the network becomes a government-owned, contractor-supported, managed services environment. The cost of COSC is $3.3 billion over five years, plus the cost of $1.788 billion for the Navy buying intellectual property from HP plus $1.6 billion for the Navy to buy already installed equipment from HP, but mostly acquired from Dell.

The total Navy/MC cost for continuing NMCI, in an as-is format, for another five years is then $6.7 billion.**

The total Navy/MCI costs will then average $3,691 per seat, unless the number of seats increases. This does not include whatever the Navy may have to spend in the future for upgrading equipment now in place.

Although the accomplishments of NMCI in consolidating applications and in improving security are very good, there is a question whether the projected five-year NMCI costs are reasonable in view of the current budget limitations. Can the Navy and the MC make further reductions in the costs of COSC over the next five years.

 A Total Cost of Ownership model that examines the savings from a virtualized and mostly thin client environment for 400,000 computers suggests the approximation shown in the Figure below. Neither cost includes the costs of contractor and Navy/MC overhead plus the expenses for security that meet evolving DoD standards:***

The total potential estimated savings are then:

With the Navy in control of computer assets and of intellectual property there is an opportunity to make a number of further cost reductions over the coming five years. How much of the savings can be realized depends on the provisions of the fixed price COSC contract with HP as well as on the organization of the NMCI network.

It is noteworthy that a large share of the NMCI costs are embedded in the wide distribution of subcontracts to small businesses. NMCI has exceeded the minimum 40 percent small-business objective set for NMCI, including 5 percent for small disadvantaged businesses, 5 percent for women-owned small businesses and nearly 1.5 percent for HUBZone small businesses. The 40 percent contract set-asides includes the participation of lower-tier small businesses under HP's large business partners, who define small-business utilization within their subcontracting initiatives. **** The presence of a large number of largely local subcontracts represents a structural risk to any attempts to cut costs.

  **Shachtman, N., HP Holds Navy Network ‘Hostage’ for $3.3 Billion, Wired, August 31, 2010