Improve the value of plant based project portfolios
To improve the value of projects, owners need to focus on the right measures of success.
SHAWN HANSEN and T J FELTS
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Refineries, chemical manufacturing facilities, power generation facilities, and other industrial plants seem to have an unlimited supply of justifiable projects. Many are driven by regulatory, safety, or other operational needs. Many are discretionary, seeking high returns (typically measured by internal rate of return [IRR] or net present value [NPV]) trying to capture a market opportunity. In examining these projects in Industry, our research shows that more than half of these plant based projects do not meet their business objectives. Furthermore, our research indicates that by improving project categorisation, prioritisation, and selection, many owners can reduce their expenditure on plant based projects by 25% and still achieve the plant’s objectives for health, safety, and environmental (HSE) and reliability. Implementing other portfolio focused and project focused best practices could potentially reduce expenditures by another 15-20%. With many sites spending between $50 million and $100 million annually on these plant based capital projects, the potential savings would have a tangible impact on the bottom line.
Figure 1 illustrates the benefit of using best practices to optimise the value provided by investing in plant based projects. Plant based projects are often difficult to assess, develop, and implement due to the varied nature of their business drivers and scope. The challenge is to optimise project selection and execution of a portfolio of projects, rather than to optimise the execution of an individual project that will achieve the discount rate or some other financial hurdle. Effective use of the capital budget in terms of project selection and delivery can provide a site with tens of millions of dollars annually in savings or improved value. Successful delivery of a portfolio of projects requires that Industry shift its project paradigm to a more comprehensive view that involves prioritising the project portfolio and managing a portfolio of projects.
Industry is overly focused on optimising individual projects
Many plant based projects are non-discretionary, meaning that they address health, safety, environmental, or regulatory needs. Some are discretionary, but address infrastructure needs that are difficult to quantify. Some keep the plant operating reliably. Others are premised on providing a huge return on investment. Still, companies expend the capital to maximise the assets’ NPV for the total life cycle. Refineries and process plants can systematically evaluate the performance of their capital project portfolios to identify opportunities to make better use of capital.
Getting the full value from the expenditure on plant based projects is difficult, because:
• There are several different project stakeholders with competing priorities
Stakeholders lack quantitative tools to prioritise and select projects and to assess project delivery, resulting in differing perceptions on project success.
• The projects are difficult to evaluate quantitatively
Quantitative assessment of projects is based on ineffective metrics, such as delivering a project within budget and schedule, leading to practices that erode rather than improve overall value to the enterprise.
• Industry’s project execution paradigm is more appropriate for major projects
Application of Industry’s large project paradigm to plant based projects results in projects that do not deliver value and fail to meet stakeholder expectations.
The interrelated nature of these issues exacerbates the challenge to deliver value. And the complexities can result in a cascade of project failures. Sometimes failure to deliver value has become so common that sites accept these problems as normal. But manufacturing facilities and project organisations can improve the value that they deliver by taking a more comprehensive view of the project process and the value generated from it, thereby avoiding common pitfalls such as:
• Projects failing to deliver the promised value
Projects generating a return are often premised on a ROI that is 50% or higher. Few owners capture all the value on some of the small projects to which they were premised because the returns are based on unrealistic assumptions that most of the time go unchallenged or are at least inconsistently challenged. If all ROIs are realised on a large facility with, for example, a budget of $100 million per year for plant based projects, and that has been going on for 20 years, the potential profits from these projects alone would be billions of dollars, notwithstanding the revenues from investment in the original asset.
• Failure to deliver high value projects
Site project organisations often lack the ability to respond to schedule driven opportunities because their project work process requires specific deliverables and timelines to ensure that no project over-runs by more than 10%. To improve the accuracy of their estimates, some sites need to develop ‘issued for construction engineering’ deliverables ahead of final funding. This practice significantly extends the front end development process beyond the norm of funding after ‘issued for design’ deliverables, and often causes project teams to miss time sensitive opportunities.
• Differing perceptions on the value delivered by project organisation
Operations representatives and commercial representatives are frustrated by an inability to deliver the projects that provide the most value. At the same time, project organisations view themselves as responding to their customers’ requests, rather than solving a problem or capturing a business opportunity.
• Constantly changing priorities
Projects are sequential in nature and are based on a set of unknowns that become more and more known as the project progresses in its development process. Shifting priorities causing different projects to take priority, and slowing or shelving other projects for a significant period of time, changes the environment. Thus, many thought-to-be-knowns become unknowns or surprises in the future, causing wasteful recycling and inefficient use of resources at best, and failed projects that have been developed based on information that is no longer valid.
• Under-utilised projects
Installed equipment is not used per the project premise because the need for the project was not vetted. The site may have been able to find a better solution to address its need that did not involve a project.
• Overspending on the project portfolio
Sites may spend substantially more than their peers on their project portfolio because unnecessary projects are pursued to ensure that 100% of the annual project budget is spent, further exacerbating poor selection and out-of-sequence engineering and execution.
Industry needs to shift its focus to the entire project portfolio
Most project organisations focus heavily on the front end development (or planning) of individual projects, and on the execution of individual projects. The metrics for measuring the success of individual projects are well suited to major projects and optimising individual projects, but not effective for driving the success of a portfolio of projects. This can also lead to inefficient work processes for plant based projects because of the enhanced focus on front end development at the project level.
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