The Economics of Modeling and Simulation … So what?

Article by: Bill Waite mailto:BWaite@AEgis%20RC.com

Modeling and simulation (M&S) has always had an economic aspect. Simulation was perceived as being ‘worth doing’, and we did it. Being something of an underground industry, however, there has not been much need or effort to rationalize the economics associated with modeling and simulation. In this respect, simulation has been like many other supporting technologies such as mathematics – you did it when you needed to, but you may not have accounted for it explicitly.

However, "…the times, they are a changin’". There is no free lunch, and simulation is not particularly cheap let alone free, however cost-effective it may be. The advent of more and more visible and expensive modeling and simulation enterprises invites explicit consideration of cost and of value of return-on-investment (ROI) in the narrowest terms and, more broadly, of the economics of modeling and simulation as a market sector.

The need to justify the cost of M&S in context of increasing economic pressure and opportunity is something many of us feel. Any such goal-oriented perspectives, however, can best be pursued from the position of truly understanding the economics of modeling and simulation. On that basis, a wide variety of economic practices may be addressed systematically and constructively.

What do we know?

The state of our collective appreciation of the economics of modeling and simulation is certainly varied and is somewhat a matter of debate.

There are some things about the economics of M&S that we know with confidence. Our ‘sure’ knowledge is that which is derived from our personal or institutional operational experience. It relates to questions that we have found prudent or convenient to pose and to answer intentionally. For instance, there is considerable concrete information in-hand about the costs and at least the ‘kinds’ of benefits of M&S, and a generally consistent appreciation of the nature of the market (e.g. who buyers are, who sellers are, what the goods and services are).

There are some things about which we are much less certain. Normally these relate to matters that are outside our individual domain of perception or concern. For instance: What do certain M&S practices really ‘cost’? Where are the cost-estimating-relationships (CERs) upon which we may depend? What is the substitution-value of M&S compared to other forms of technology in supporting system development and evaluations? There is at least some justification for the judgment that this knowledge is fragmentary, unsystematic, and not generally available, and thereby less than fully useful.

Finally, there are things that we might reasonably agree we do not know much about at all. These topics include the comprehensive appreciation of M&S markets worldwide and across applications domains, market dynamics, and the evolution of M&S economic practices. Generally, these are questions for which there has been no perception of need or opportunity to have asked about before.

What are we talking about?

We are concerned here with the intersection of the domains of economics and modeling and simulation, and particularly with the economics of M&S (rather than with the M&S of economics).

Some definitions of terms may be unfamiliar, (e.g. ‘economics’ - the study of how society manages its scarce resources; ‘market’ - a group of buyers and sellers of a particular good or service; and ‘marginal rate of substitution’ - the rate at which a consumer is willing to trade one good for another); but they are likely to be suggestive. For instance: What are simulation’s scarce resources? What are all of its goods…its services? Who are M&S buyers?…sellers? What can M&S goods be traded for?…at what rate? Which agencies serve in the role of market-maker in the M&S economy?

While the complexity of economic market analysis deserves attention, it seems at times remote from the day-to-day practice of modeling and simulation. In its simplest form, however, the economics of modeling and simulation is about deciding what any of us will do with our ‘next marginal dollar’. This is something that, regardless of our role in the industry, we can all appreciate.

Why care?

There are a variety of reasons to care about the economics of modeling and simulation. First and foremost, economic considerations affect what we do in conducting the business of M&S. Economic factors influence our estimation of the prospective value of investment in simulation development or in the use of simulation assets. Similarly, economics is a determinant of many critical decisions. Shall we pay the price (cost) to invest in M&S or not? Sellers, for instance, invest in bringing products and services to market in order to make a profit. Buyers invest in product and service assets to get best value. Users invest in procuring and employing simulation assets for improved operational efficiency (e.g. the do-your-mission ’faster, better, cheaper, or only way’ point-of-view)

At a slightly more abstract level, understanding market-related behaviors (e.g. standards, shared resources, collaborative operations, pricing, substitution for alternative goods and services, product evolution, generally accepted accounting principles, and M&S cost and value reporting formats) is important too. For instance, conventions made to account for the cost and value of M&S and reporting these findings in ways, which facilitate comparing like systems, would be immediately valuable. This understanding can help us build a more broadly shared simulation market constituency, it can provide us the opportunity to operate more globally, and, ultimately, it can facilitate our being good at what we do in an economically successful manner.

The bottom line is that what we know (and do) about the economics of simulation matters - it influences how well we do the business of M&S.

What’s up?

Simulation stands at a watershed. M&S has been growing in both its scope and effectiveness in a variety of venues for decades. Heretofore, however, that evolution has been relatively parochial to particular application domains and consequently limited in its effect upon simulation technology, assets, and processes. With the advent of practical and effective standards and continuing expectation for cost-effectiveness, a new and more open business-practice-model for modeling and simulation is emerging. These new practices will apply across many domains that were previously insulated by the peculiarities of subject-matter expertise or application, and they will benefit simulation professionals and users alike.

In this context, the economics of M&S is becoming progressively more significant. Certainly, pre-existing interest by the DoD and the Defense Services, industry and academic institutions such as the McLeod Institute have shed considerable light on this topic. However, since: a) the appreciation of the economics of M&S is generally relevant to the entire M&S community, b) the understanding of the economics of M&S is valuable, and c) it is possible to improve our understanding of the economics of modeling and simulation, a collaborative initiative to explore the economics of modeling and simulation has been launched.

By way of canvassing the various M&S communities, the Society for Computer Simulation (SCS) conducted a focused track at the Summer Computer Simulation Conference (SCSC ’99) in July. They explored the topic to good effect, and a subsequent track at the International Test and Evaluation Association (ITEA) Simulation Conference in Las Cruces in December will investigate particular implications of the economics of M&S for the T&E community. The topic is being introduced into MORS and NTIS venues as well. Finally, recommendations have been submitted encouraging the SISO to include the topic of M&S economics in its institutional agenda, and arrangements are being made to conduct discussions on the topic in concert with the up-coming SIW meeting.

The opportunity for simulation professionals to collaborate in many application domains has never been better. There is no topic that is more generally interesting or more likely to be illuminating and productive than the economics of modeling and simulation. During the next 18 months, a variety of events are planned to facilitate the informal, collegial investigation of the details of M&S economics. Anyone interested in participating in and affecting the exploration of the economics of modeling and simulation is welcome to contact the author for information about past and future events.

Bio:

As founder and President of AEgis Research Corporation, Mr. Waite directs a staff involved in a wide variety of modeling and simulation activities including: simulation technologies evolution; simulation systems development; simulation verification, validation, and accreditation; simulation-based studies and analyses; and the development of hardware and software products supporting modern M&S practice.

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