PROJECT MANAGEMENT ....Capital project value improvement in the 21st century: Trillions of dollars in the offing PART I

Capital project value improvement in the 21st century: Trillions of dollars in the offing PART I

A holistic and practical approach can increase project value by making capital spending more efficient.

It’s well-known in the industry that large, complex capital projects routinely run over budget and behind schedule. One study of 800 major projects (those of value over $1 billion) found that, on average, projects were one year behind schedule and 30 percent over budget.¹ But what’s true for major projects is similarly true for projects of various sizes, even projects as small as $10-$20 million.

There is an art to project delivery—one that is shaped by critical factors like good leadership, technologies, and even financing models. But another component can also provide greater efficiency and effectiveness to all projects. Project value improvement (PVI) rigorously identifies tools, management practices, and capabilities that optimize a project’s financial value from early concept to front-end engineering design (FEED).

PVI integration could recover trillions over time

McKinsey analysis estimates that global capital spending will total $77 trillion between 2018 and 2023, which places the annual value of that spending at more than $10 trillion. Historically, owners that rigorously integrate PVI have realized in excess of 10 percent of project value in savings. That means if PVI best practices were implemented at scale, an annual benefit on the order of $1 trillion is possible.

PVI is a systematic method used to improve a project’s financial value or cashflow. This process most often involves reducing its capital or operating expenditure; increasing its output; or accelerating its completion date so it becomes profitable more quickly. The crux of PVI lies in a comprehensive, “no stone left unturned” approach to identifying and evaluating creative alternatives to a project’s economics, with the goal of achieving a higher project return.

Currently, PVI practices are only being applied intermittently. But the few project owners that do regularly practice PVI achieve significant monetary and temporal benefits, gaining considerable advantage over their competition.

Consider this example: A global mining house planned to build a $7 billion greenfield project in a new geography, with the goal of market expansion. However, cash constraints created challenges in scoping the project. The management team embarked on a rapid six-week process of pressure testing each element of the project, maturing the best ideas and developing a plan to embed them into the base project design. They also revisited multiple elements of the project to look for additional opportunities to reduce costs.

In full, the effort generated more than 100 new ideas and actions to optimize the project. Implementing these ideas resulted in a new processing plant configuration that improved operability, maintainability, and constructability; realized more than $1 billion in capex reductions through reductions in quantities and specifications as well as the use of preassembly and prefabrication; and improved net present value (NPV) by 60 percent.

PVI’s origins and evolution

PVI began in the 1950s as “value engineering,” where an engineering department’s technical solution aligned seamlessly with the economic realities of the business case. With both working in concert, efficiencies were achieved.

Value engineering next evolved into the Stage Gate Process (SGP), a systematic implementation of rigor into the extraction, processing, and other capital-intensive industries between the 1990s and early 2000s. The SGP improved the predictability of project performance in terms of both capital expenditure and delivery timeliness.

In the 2000s, this changed. With that era’s capital project boom, best practices took a back seat to schedule acceleration. Project owners rushed to bring projects online. Not surprisingly, this lapse in project-development fundamentals led to the rise of overbudget and behind-schedule project delivery performance.

A mining executive observed: “During the last commodity boom, many mining projects were rushed. They struggled to get talent and resources. Because of that they abandoned many of the typical good practices including a robust stage-gate process with independent and objective analysis and vetting. A lot of bad practices went unchallenged.” Today, two entrenched cultural mind-sets continue to frustrate attempts to improve performance.

First, PVI is commonly viewed or performed as a one-time exercise applied only at the final investment decision of a project. Most owners do not, however, view it as a rigorous, ongoing process that must be applied throughout a project’s lifecycle. When PVI is relegated to later project stages, it is often left undone or only partially complete, abandoned in lieu of scheduling considerations.

Second, after two decades of industry history where PVI practices have been scarcely applied, there now exists limited organizational talent and a lack of institutional knowledge about the implementation and rewards of PVI.

A large defense capital project executive explained: “Little institutional knowledge of capital project value improvement is to be found in my organization. Value improvement is a one-off effort when there is push from the top, but not something people do and think about daily.”

Reimplementing the wheel: PVI for the next generation

There are no silver bullets to delivering projects with poor returns. But there are solutions. And the greatest outcomes can only be achieved through a holistic application of PVI. While any one aspect of PVI can improve a project, only a comprehensive PVI implementation can optimize an entire project.

We generally group the elements of project delivery into three categories: mind-sets and behaviors, management systems, and technical systems.

Mind-sets and behaviors

Treat capital as if it is your own

First and most essentially, employee mind-sets and behaviors must align with strategic business objectives. Without that fundamental principle, real, sustainable, organizational change will not occur.

Each discipline within the organization must understand its role within the context of the broader objective. To accomplish this, leadership and/or a leadership-appointed PVI manager/team must drive the PVI process, communicating and reinforcing expected behavior for each group through formal processes embedded throughout the culture. The value of this cannot be understated.

To ensure lasting PVI cultural integration, owners and project teams must require every project to undergo PVI review. In addition to project savings, this trains staff and reshapes culture to incorporate the PVI philosophy in all future projects and take ownership of the capital deployed in each one.

An agrichemicals company in Europe had placed a critical project on hold for three months due to escalating cost estimates. After reviewing the project rationale, the project team—including discipline engineers and plant representatives—held a two-day workshop in which they interrogated the existing project design and developed potential alternatives. They generated more than 60 ideas to improve the project. 25 of those ideas were prioritized and implemented into the revised plan, resulting in a 15 percent improvement in NPV. In addition to the quantifiable savings, the exercise instilled a cultural expectation of true ownership for project team members to challenge each other’s assumptions in a drive to improve design.

Independence and de-biasing

Unconscious bias is well-documented in many forms: from confirmation bias, where one tends to interpret evidence as affirming one’s existing theories, to anchoring, where one disproportionately relies on an initial piece of information. It is no surprise that such biases complicate capital allocation, which involves making choices amid significant uncertainty.

No amount of analysis can counter biased decision making, but world-class organizations formalize dedicated systems and processes to reduce it. For example, designating a PVI leader who is not closely associated with the project team or owner can inject more objectivity into the PVI process. Independence can also be achieved through approaches such as:

·         Simulating red team-blue team exercises in which an independent group plays a deliberately adversarial role in challenging a point of view

·         Conducting premortems in which teams imagine a project has failed and work backwards to determine root causes

·         Deploying central project decision support and scrubbing teams who are responsible for identifying and interrogating bias

The most successful de-biasing systems maintain the appropriate level of tension between the independent challenger and the project owner’s institutional knowledge.

CONTINUES  IN PART  II