By Phyllis Kulkarni, IPA Manager of Site-Based Systems
Do you want more projects for the same capital, or less capital for the same projects? If you can improve your capital effectiveness, you’ll have the lucky “problem” of trying to answer this question. Benchmarking is a way to identify the gap in performance for your site versus Industry and a clear path to improvement. But implementing those improvements can be hard work. So how do you sell the business, your plant manager, or others at the top not just on the need to benchmark, but on launching the improvement journey?
Let’s walk through the business case for improvement. Suppose your site spends 10% more than Industry to develop and install the same scope. That’s a pretty typical result for a first-time benchmarking, but it’s not uncommon for IPA to encounter sites that waste 20% or even 30% of their capital.
If your project portfolio is $100 million, you ought to be able to deliver that same portfolio for closer to $90 million. You save capital, everyone’s happy. Or you get the same capital, but now can deliver 10 or 20 more projects.
Sounds good, but the big boss has heard of IPA and frankly he thinks all that Best Practices stuff costs too much and takes too long. How can he be sure that the payoff is still there? What does it cost to improve and what is it worth?
To make that dramatic improvement, you might need to hire resources. The most common gap we see at sites is a lack of owner estimators/controllers or sometimes even project managers. Let’s say you need to hire 4 additional resources at $200,000 per year for each additional resource – that’s $800,000! Of course, you have to recruit those people and train them. You might need to upgrade your work process documentation and train the whole project group in some of the new Best Practices you’re going to require. Let’s ballpark that at another $800,000. And we won’t leave IPA out of the equation – the cost of benchmarking every few years as well as the cost of your folks’ time to participate in the benchmarking (pretty modest at less than $100,000). Add it all up and we get an average cost of improvement over 4 years of about $1.8 million.
Sure, that’s not so much when you consider the $10 million you could free up year over year by executing your projects at a lower cost, but it’s easy to balk at spending money to save money. So put it in business terms – that improvement translates to a 4-year NPV of $24.1 million and an IRR of 247%. And that’s just at one site.
Worth it? The sites that have delivered this improvement certainly think so. But if you need help building the case, contact me at firstname.lastname@example.org.
As IPA’s Manager of Plant-Based Systems, Phyllis Kulkarni oversees all global small project benchmarking, turnaround benchmarking, and licensing of the FEL Toolbox software. Phyllis joined IPA as a Project Analyst in 2002 and has led numerous site benchmarkings, project evaluations, and onshore and offshore megaproject assessments. She is fluent in English, Spanish, and Portuguese. Phyllis can be reached at email@example.com