Section 1.8 - Organization and Economics

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The Systems Engineering approach described in Section 1.5, along with the tools and engineering specialties in sections 1.6 and 1.7, cover parts of how design gets done. Although not strictly part of the design process, a large and complex space project also needs an effective Organizational Structure to function. An organization allocates tasks, coordinates the work, makes decisions, supplies the various resources and inputs needed, and provides support to the core design, production, delivery and operations tasks. Individual projects may be part of a larger program or ongoing business, and organizations must then sequence and allocate between them.

Economics is the social science that studies production, distribution, and consumption of goods and services. Space projects are then an economic activity, and part of a general economy. Large projects need a source of necessary resources, which is often in the form of money. The tools and methods of economics are therefore used to analyze, justify, and obtain the needed money and resources. Organizations and economics are extensively studied at business schools, such as the over 100 courses at MIT's Sloan School of Management, and there are many textbooks on these subjects.

Organizational Structures[edit]

There are a number of organizational structures that have been used or are possible. Which ones are best suited to a project or program depends on the complexity, duration, and life-cycle stage of the tasks. Structures may be changed or replaced over time as the needs change. Humans are social entities, and their individual needs, desires, and motivations differ. This has to be considered along with technical questions like what kind of desks and workstations to use. Membership in an organization is usually not permanent, either because the project's or the individual's needs change. Continuity of a project has to be supported when this happens.

Structural Types[edit]

For a given project, you can adopt an existing structural type. For an ongoing program or business that structure may already be in place. You can then modify the existing type to accommodate the specific needs of the project. Alternately you can design a custom organization in the same way as you design a custom piece of hardware. The choice will depend on the potential gains from customization, versus the lower adoption cost of an existing type. Existing structural types include:

  • Entrepreneurial - One or more founders or leaders make decisions, and communications are direct person-to-person. Staff are added on an ad-hoc basis, and tasks are not rigidly defined. This type is suited to new projects at an earlier stage of their life cycle, where many decisions have not yet been made, and change is rapid.
  • Bureaucratic - This may be thought of as a machine made of people. The structure has a degree of standardization, with defined roles and responsibilities, a hierarchical (pyramid) structure, and respect for merit. It is suited to larger and more complex organizations. Since one person can't comprehend all the details or have time to make decisions for a large organization, information flow and instructions are compartmentalized through the pyramid structure, with a given person responsible for actions at their level, and one level up and down. Rules and standards make tasks routine, so decisions are reduced to exceptions or changes. The accumulated structure and rules makes this type harder to change when needed.
  • Networked/Consensus - In the previous two types, decision-making is concentrated in a few leaders. In a network or consensus structure, decisions are reached by multiple interested parties. Communications flows to and from any point in the network as needed. This is suited to more rapid and ad-hoc change, but increases effort to make decisions because more people are involved. However, increased information inputs can lead to better decisions, and wider participation can lead to better acceptance and enthusiasm.

Structures are not usually pure examples of any of these types. For example, bureaucratic ones may have boards or committees which reach decisions by consensus, and organization members may communicate through an informal network in addition to a formal pyramid structure. The parts of a structure may be defined by specialized functions, such as production, marketing, staffing, and accounting. It may also be divided by location or product, where each part includes multiple functions. Again, mixed examples are possible for a given organization, with some parts functional and others location or product-based.

Designed Organizations[edit]

An organization capable of designing and building complex space projects is usually itself a complex entity. Therefore systems engineering methods can be applied to the design of the organization itself, as well as to the space systems they produce. In this approach, the organization is treated as a system, where inputs like staff time, office buildings, and factory buildings produce outputs like launch vehicles and spacecraft. By comparing the outputs to the inputs, you can decide if a given project is worth doing. The internal functions and flows within the organization determine the relationship of inputs to outputs, and so are subject to analysis and optimization.

Designing an organization this way is not often done for several reasons. First, organizations often have a history, and existing structures and methods in place for how they operate. These may have developed before they started on space projects, and even before the systems engineering method existed. If existing organizations and methods have worked well enough, the need to optimize or update them may not be felt. Second, people are often resistant to change, especially when that change involves re-designing or eliminating their own job. Some people are attracted to the power or money that comes from a position within an organization, and so oppose any change that would displace them from that position. Third, many people in a high position believe they know better how to organize and run things. This results partly from the well known psychological cognitive bias of Illusory Superiority, where people in general misjudge their ability relative to others. It also partly is due to the belief that reaching a high position by itself demonstrates superior knowledge and ability. Lastly, there is the fear that any changes will break how the existing organization operates. This is a fallacy because organizations in general are capable of doing things no single individual can do, like design an entire airplane or computer operating system. Therefore as a whole they should be more capable of designing the organization itself than any single individual within it. Nonetheless, these various barriers exist and should be recognized.

If an organization is new, or being organized for a specific project, most of these barriers cam be overcome. Then a rational application of the systems engineering process can find the best organization structure. This can be one of the existing types, since they exist for good reasons. But choosing a structure by design is better than choosing one by personal preference or random accretion, since it is more likely to produce a better result. Another way to implement change is to use an outside organization to design the new structure, present their results, and then have the old organization adopt it as a whole. Approached in this way, individual objections can be overcome, but it can also induce loss of staff beyond that caused by increased efficiency.

Project Management[edit]

Project Management is the discipline of initiating, planning, executing, controlling, and closing the work of a team to reach specific goals and success criteria. A Project has a defined goal and end point, whereas a Program is a larger effort that may include multiple projects. Programs may be open-ended with no definite end point, such as "explore the Solar System". Programs use more permanent organizations such an agency, research institute, or business enterprise. Individual projects can draw from these organizations, and later return staff and other resources to apply to the next project.

Historically, skilled and experienced individuals such as architects, engineers, and senior craftsmen led large projects, which were usually in construction. By the 1950's, project management had become a distinct discipline from these skilled fields, with its own tools and techniques. There are a number of approaches to managing a project, including applying systems engineering to the whole project. The rapid growth in complexity and scale of projects has driven the creation of new methods to manage them, and this is an ongoing process today. New tools like computer networks and software enable some of these new methods. See Wikipedia's Outline of Project Management for a more detailed overview of the field

A Project Manager is a person given responsibility for part or all of a project's execution. Traditionally managers are placed on top of an organization structure, but that is a matter of history, not necessity. They combined several functions such as planning, decision making, and coordination, in an era when communication was more difficult. Modern computer networks allow everyone on a project to have immediate access to all project information, so the need for top-down hierarchies is reduced. Quite large and complex projects, like the Linux operating system, have been developed mostly with self-directed work. However, many space projects require dedicated specialists, large buildings, and other resources that are difficult to obtain on individual initiative.

Typical project management processes are:

  • Initiating - which includes identifying needs and requirements, reviewing existing operations, financial analysis, stakeholder analysis, and establishing a project charter.
  • Planning - of time, cost and resources for the project tasks. This includes a breakdown of deliverables and organizing a logical sequence of the work.
  • Production and Execution - consists of following the plan, allocating staff, outside supplies, physical space, and other resources as required.
  • Monitoring and Controlling - includes observing production and execution to identify and correct problems, and measure performance and variances from the plan.
  • Closing - includes formal acceptance of the project outputs, ending contracts, reassigning resources, and archiving data and knowledge gained.

Project Funding[edit]

Large projects need a way to obtain all the resource inputs needed for their completion. An existing organization or program may have some of these resources, like land and buildings, in place already, but nearly always some additional ones need to be supplied from outside the project. In modern economies, Money is a generally accepted medium of exchange, which can be traded for all these resource types. This simplifies the resource provision task to obtaining enough funding in monetary form. There are a number of different sources and ways to obtain project funding.

For space projects, the sources can be divided into three main sectors - government, business, and social - which relate to major parts of economies in general. We will list them individually, but a mixture can be used for a given project. As examples, governments often hire businesses to build parts of space projects, businesses use government-owned launch sites, and partnerships between sectors are common. The differences involve sources of funds and objectives, but not as much the technical issues. A rocket engine works the same way no matter who pays for it. What kind of rocket engine gets built, however, may depend on available funds and who is the source.

Government Funding[edit]

Governments were the first large source of funds for space projects, growing from military uses like ballistic missiles and spy satellites. This was followed by scientific and earth observation missions such as weather satellites. These uses are intended for the general public benefit, and so obtain their funds through taxation or appropriation. Governments decide how to apply the funds to projects by political processes. This is typically by means of annual budgets, where space projects are part of more general government funding. Although theoretically for the public good, in practice other factors enter into political decision-making. Typically space projects are carried out by a mixture of internal government staff and facilities, and outside purchases of goods and services.

Business Funding[edit]

Businesses normally operate to generate profits for their owners. Early space projects were high risk, and so were mostly carried out by governments. Businesses were hired to carry out parts of these projects because of special skills or production capacity the government did not have. Since government guaranteed payment, this lowered the risk and businesses were willing to participate. Communications emerged as a profitable space business because information has no mass, and so the high cost of space transport did not affect that business as much. Space industry beyond government projects is now the dominant economic sector. In the future, additional types of space businesses are expected to grow as transport costs come down. Businesses obtain their funds from investors, retained previous profits, and finance on the open market.

Social Funding[edit]

Social funding comprises non-profit foundations, research organizations, private donations, and volunteer efforts. Large terrestrial telescopes are an example of projects funded by a mixture of social and other sources. This type of funding is at a relatively small scale compared to government and business.

Financial Analysis[edit]

Whatever the source of funding, large projects have to justify themselves to be approved, estimate the funding required, optimize the use of funds, and implement the acquisition and distribution of funds during the project. Various tools from economics and Accounting are used for these purposes. Money is often used as a common measure to compare disparate resource and output types. However it should not be the sole measure to evaluate projects. Measures of Effectiveness, as described in Section 1.5, are a way to evaluate non-monetary factors like performance and safety along with monetary ones like cost and revenue. These kinds of measures can also be applied at the organization level.

Finance is the science of money management. Among its other uses, money is a measure of value to the end users of a project, and a measure of the resources a project will consume. The concepts and formulas from Economic analysis are useful in project decision-making and optimization. If there is too little value in relation to resources, a project may never happen at all. Resources include human labor, physical resources, and intangibles such as rights to use something. The resources to run the organization itself is often a major part of total project resources. So organizational efficiency is important to reaching desired program cost and schedules.

Project Finance is obtaining money for a project from other than internal sources of the sponsor. This is often necessary for new organizations, and for large projects which exceed the scale of previous organization efforts. Financial estimates are developed before money is actually required to determine if a project is worth starting, and how much funding will be required. Actual spending during a project is tracked to compare progress to estimates, in order see if additional funds are needed or if there is surplus to apply elsewhere.

Life Cycle Cost Analysis[edit]

Life Cycle Cost Analysis is an economic method that accounts for all costs of a project, from initial concept to final disposal. It parallels the general Systems Engineering method of considering the entire life cycle of a project from start to finish, but focuses on the financial aspects. The method applies some basic financial concepts:

  • Time Value of Money - Human life is finite. Therefore the amount of time you can expect to use resources, or their equivalent in money, is shorter at a future date than it is in the present. Changes between now and a future date may affect the desirability of any given item. For example, an old computer that may have been useful at one time has become less so due to changes in technology. Inflation can also affect the future value of money itself. For these reasons, humans attach greater value to something now than in the future, a phenomenon known as Intertemporal Choice
  • The Interest Rate is a measure of how much more value the present has over the future. It is the percentage increase per time, usually years, needed to equate a future value to a present one. In other words, how much larger a future value do you demand to delay a present use? Reversing the time order, a future value is reduced by a percentage per time, called the Discount Rate, to equate it to the present.

Costs and benefits of a space project may extend for a number of years, and costs generally happen before benefits. Therefore both are equated to Present Value by applying the discount rate. Which discount rate to use depends on who is providing funding. A government generally has a lower one than a business because they assume a longer time horizon to collect benefits.

Financial Estimating[edit]

Future costs and benefits are not known exactly, especially when a project includes developing new technology. Since these predictions are often key in deciding if a project happens at all, or which design options are used, it is very important that they have as sound a basis as possible. Therefore various estimating methods have been developed to predict the financial flows for a project. They vary in detail and accuracy based on stage of the project. Regardless of which method is used, some margin or range should be included in any estimate to allow for errors in estimating, or unanticipated costs. Methods include:

  • Historical Costs - This is based on similar past projects, and uses units like number of person-hours, drawings, or lines of software. These are multiplied by historical rates for the given parameter.
  • Parametric Estimates - These are formulas for an entire finished item using multiple parameters such as mass and stress level, and factors such as "simple design" or "complex design" to modify the basic values.
  • Bottom-Up Estimates - This approach makes estimates for individual parts of a project at a detailed level, then summing them to get the total cost.
  • Supplier Quotes - A supplier or sub-contractor who makes a definite quote on part of a project replaces an estimate with a specific number.

Large space projects typically have many cost components, and use specialists for cost estimating and tracking, with tools like spreadsheets to integrate the data into useful summaries.

NASA has a Cost Estimating Handbook developed internally for space projects. The International Society of Parametric Analysts has a Handbook for more general projects.