Aurecon’s Quartile One Asset Performance team, which has conducted extensive data-driven studies of capital programme performance for over a decade, refer to these scenarios as “accelerated” capital programmes.
Many of these accelerated programmes are the consequence of strategic changes (such as managing the current COVID-19 crisis), regulatory changes, economic stimulus or simply a top-down mandate which requires capital to be deployed more rapidly. We have also seen the proactive acceleration of capital programmes to bring financial returns forward, improve performance and reduce business risk.
Accelerated capital programmes are characterised by:
Given that organisations tend to create an internal system of work and external supply chains to support their average annual capital spending requirements, these step-changes in the rate of spend can create major pressures on the project organisation, processes and systems.
Unfortunately, a common perception is that less constrained capital equates to easier decision making, but in reality, the opposite is true. When a capital programme is accelerated many new pressures manifest. These include increased complexity in surfacing and prioritising the right projects, increased attention from stakeholders such as directors and shareholders, increased conflicts over asset access and downtime, and constraints in both project and contractor resources and capability.
In addition, the rush to rapidly increase spend often devolves into a ‘let’s get it done’ culture with the dominant key performance indicator (KPI) being percentage of budget spent. The significant engineering, operational, and technical challenges start to consume the programme leaders’ attention rather than the delivery of business value by which a programme is ultimately judged.
Due to the significant capital funds being deployed, an accelerated capital programme is typically scrutinised by a broad range of stakeholders, and lack of focus on the real challenges rapidly results in a lack of confidence of the capital team.
The Quartile One Asset Performance capital benchmark library has many examples demonstrating that organisations struggle to meet these challenges in a way that maximises the commercial outcomes from the capital invested. We have categorised five pitfalls which, in combination, can reduce the return on capital by half and jeopardise the financial sustainability of an organisation:
In many instances, temporarily slowing down the programme to consider how to best prioritise and optimise the spend would have delivered a significantly more beneficial outcome to the organisation. The typical response of focussing on delivering spend ignores some very critical considerations and ultimately results in real business opportunities being left unrealised.
To unlock the potential of an accelerated capital programme, a different approach which focuses on business value, as opposed to delivering spend, is needed.
Leaders of best practice accelerated capital programmes understand that success depends on application of best practice commercial expertise as much as engineering acumen. Organisations with successful accelerated capital programmes typically:
Such organisations view capital spend as a business challenge as opposed to a technical engineering one. Spending capital well requires many different considerations and trade-offs. In some cases, this may include investing capital in an option that is sub-optimal at a project level to maximise value across the project portfolio.
We believe best practice accelerated capital programmes requires that decision makers understand the fundamental business context, risks and goals of the organisation. Only then can an informed commercial judgement be made around the technical options, benefits and trade-offs. Integrated teams including the chief financial officer, engineering, technical, and operations functions all need to be part of this solution, reviewing projects that are underway and how they can be optimised to deliver the best value.
Thankfully, detailed analytical, forecasting, evaluation, and optimisation tools now exist which can be applied to facilitate this multi-dimensional approach. But determining which projects are right for your organisation will still require a broad range of core commercially-focused capability as well as technical and project delivery capability.
In our ever-changing world, as asset owners continue to face the increasing challenge of balancing service levels, asset performance, risk and capital expenditure over the lifecycle of their assets (and across their portfolios) effective management of capital programmes, especially accelerated programmes, is critical.
A disciplined focus on ensuring return on capital not only improves asset risk and performance, but frees up cash to further expand, invest in social licence to operate projects, improve the financial health and prosperity of the organisation or simply return higher dividends to shareholders.
In our experience, and what our ten years of data demonstrates, is that when organisations implement accelerated capital programmes well, they not only achieve their business outcomes but also become stronger, more competitive and increase their social licence to operate from their community, customers and owners.
This thinking paper is part of a collection of insights and expertise from Aurecon as it explores leading through and beyond the COVID-19 disruption. Explore our insights here.
Rob Beckman is Aurecon’s Global Lead for Quartile One Asset Performance. Rob is a senior executive in the resources and heavy mining sector, with over 15 years’ experience in surface and underground mining operations, rail, port and energy. His experience includes asset management and sustainable asset optimisation strategies for a range of commodities and project types.
Elisha Bellchambers has over 20 years of commercial experience in the areas of financial performance, data analysis, risk mitigation, business strategy and leadership and asset management. Elisha’s asset management experience allows her to draw on links between an organisation’s data analytics, business needs, and its high-level business decisions to drive business value and return. She has worked on numerous asset performance projects with decision makers around the world.