THE  BUSINESS  ISSUE

The client had recently gone through series of mergers which resulted in disparate asset types being combined under the one corporate structure. Each business unit incorporated into the merged entity had a different approach to determining how to allocate capital for the maintenance and expansion of the assets.

The amount of capital to be allocated was significant ($350M) and the rationalisation of disparate processes provided an opportunity to implement a best practice approach across the entire business.

 

CHANGES  IMPLEMENTED

Case_Study_001_Pic_002Following an initial review d2e designed and implemented a corporate wide capital allocation process. The process optimised the portfolio outcomes within available resource constraints while achieving target objectives.

Having helped many large organisations establish best practice portfolio governance and selection arrangements, d2e brought several insights to the implementation. The key insight (as shown in the picture) is realising that portfolio selection is critical to creating value: selection typically costs less than 5% of total investment, but locks in most of the potential value. Therefore getting the selection process right has a large multiplier effect on business value.

Preparing for the Change

To build a robust foundation for the process transformation required it was critical to agree the governance framework and core design elements of the solution. Some of the questions that were addressed as part of this foundation step were:

  • What are the corporate objectives?
  • What targets should be assigned to these objectives?
  • What is the relative importance of these objectives in case trade-off choices are required as part of the optimal selection?
  • Who is involved in the portfolio selection step and how are decisions made?

With the foundation in place the process and selection methodology details were crafted to fit the organisational context. Additional detail on these changes is provided below.

Adapting Process Design to Context

Capital selection is not an annual set and forget task – the process implemented supported a continuous optimal selection. This was tailored to pick up relevant existing process elements – supporting systems, embedded business case and approval process – consistent with the overall design. At the same time best practice methods – benefit measurement methodologies, mathematical optimisation model – were included in the process to ensure the integrity of the selection step was not compromised. The picture provides an overview of the life cycle of the candidate projects and the main stage gates.

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Designing the Optimisation Model

A best practice selection approach that was relevant in this situation was preserving the contribution of each candidate project to the agreed business objectives. A typical approach is to condense project benefits into aCase_Study_001_Pic_007 ranking score.  However preserving the contribution of each project to the agreed business objectives (as was done in this case) enables visibility of relative contributions throughout the selection process. It also enables a rigorous mathematical algorithm to be applied to derive the optimal portfolio.

As the diagram illustrates, in an unconstrained situation both methods lead to the same outcome. However when capital is constrained (A) optimising rather than prioritising delivers significantly greater business value (C vs B). It is possible to demonstrate this by running both selection approaches in parallel and compare the outcomes of the two approaches.

Preserving rather than condensing the contribution of each project to the agreed business objectives has another benefit. It is possible to see the relative contribution of each project to the business objectives in a portfolio scenario. An example output from the Optimisation Model is shown below where the contribution of each project to the different business objectives is shown in their value–for–money order.

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Deploying Effective Decision Tools

Enabling the effective interaction of a senior team with a selection process is critical to ensure the portfolio selection decision has executive buy-in. An effective way to do this is via dashboards which show the impact on business objectives across various portfolio scenarios. Case_Study_001_Pic_003

Providing Visibility and Confidence - Tracking and Reporting

The selection process needs to be supported by a portfolio level tracking and reporting capability. This provides visibility of progress against the target outcomes and helps complete the feedback look with the selection process. The one page discipline is important and an example is shown below.

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BENEFITS  DELIVERED

  • A 15% reduction in capital spend (base of $350M) to achieve the target business objectives
  • Implementation of a process which enabled ongoing changes to the portfolio mix rather than an annual one-off selection process
  • Ability of the executive team to make trade-off choices by comparing the outcomes of different portfolio scenarios
  • Visibility and confidence across all key stakeholders that the capital spend was being accurately directed towards strategic objectives