Capital Efficiency and Portfolio Management
The optimisation of capital planning and management is a key business imperative in capital intensive industries, particularly in the current capital constrained environment. Optimisation needs to occur at both the project and portfolio level (across projects). Planning and management of large capital projects is complex with many variables and uncertainties.
Organisations need to be aligned on how strategic objectives will be achieved in order to maximise return on shareholder investment. Without alignment there is a high potential for shareholder value erosion. An effective capital allocation process and methodology allows each level of an organisation to do what they do best. Improved alignment helps create clarity around strategic direction, decision criteria, monitoring of milestones and more. In the broadest possible sense, perhaps the chief benefit of effective capital allocation is that an organisation will have improved its chances of moving into the future in unison. (Extracted from “Maximising Capital Efficiency: Converting Strategy into Results- Without Mergers or Acquisitions” by Charles Alsdorf and Chris Ruggeri, Deloitte USA)
Project Capital Efficiency
Key Questions
- How will the key drivers of a project have an impact on value and risk?
- What assumptions are embedded in the business case, and how can they be challenged and validated?
- How can the project’s downside risks and upside opportunities be quantified, mitigated or exploited?
- What is the full view of value and how can we maximise project returns?
Our approach encapsulates a detailed value improvement process coupled with a rigorous capital business case robustness review.
The first source of project value is achieved through the project robustness and risk review. The business case is evaluated, assumptions tested and validated, while risks are framed and key drivers are modelled stochastically. The risk profile or probability distribution of the project outcome is assessed to allow the project team to identify mitigation strategies that limit the downside (or tail of the distribution) as well as opportunities that would increase the upside; thereby improving the overall expected value of the project. This phase will often include an overview of the macro business environment and its effect on the project economics.
The second source of project value is achieved through improving the current project design (e.g. increasing mine hoisting capacity through the elimination of bottlenecks such as limited ore passes) and identifying ways to eliminate waste (e.g. double handling of material). Analysis of how value is created throughout the engineering phase enables the project team to identify value enhancement opportunities in the engineering designs and project processes.
The third source of project value is achieved through identifying new sources of value, such as strategic options. This involves a commitment to managing the project dynamically as project uncertainties unfold. By recognising that value is often enhanced through strategic flexibility, we explore how the business case can include opportunities that might not have been considered as part of the original business case, e.g. exploring the extraction of other elements in the feed stream of a beneficiation plant.
Value enhancement is achieved through various techniques that range from idealised design, process synthesis, value stream mapping, value driver modelling, decision tree and real options analysis as well as stochastic modelling techniques applied to various components such as the business case, commodity price exposure and project schedule. The position of the project in the overall project lifecycle will determine the focus of the review and the warranted analysis.
For companies with many capital project opportunities, shareholder value is further enhanced by developing a project portfolio prioritisation model that accounts for shared risks, project interdependencies, multi-year horizons, alternative project funding levels, opportunities to defer projects and other portfolio level challenges.
Project Portfolio Management
Capital markets expect great things from corporate boards when it comes to capital planning. Board members, and the executive they work with, are under tremendous pressure to identify, fund and implement all the correct new investments that lead to short-term success, long-term opportunities and increased return on capital. But, how should boards weigh the trade-offs between competing objectives, especially when funding requests exceed available dollars?
Key to improved capital efficiency is choosing the optimal portfolio of projects for funding. Boards are presented with the cost and benefit information, generally as measured by a net present value or an internal rate of return for specific projects. This is a step in the right direction, however it excludes the following key elements that need to be incorporated into the decision making process: interdependencies between projects; tradeoffs between short- and long-term goals; optimal levels of funding; shared risks; and alignment with corporate business strategy.
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