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Understanding

value-drivers for
major projects
A value-driver based
approach for ensuring
projects deliver value-
based outcomes
February, 2014
Authors: Phil Noble, Simon Wilkins,
Amber Anderson
Value Drivers for Major Projects

Using value-based
management to improve
capital project outcomes
The Australian infrastructure backlog, and In fact, 48% of projects fail to meet their time,
the opportunity isn’t going away cost and quality objectives, according to The
Review of Project Governance Effectiveness
Infrastructure Australia in their latest priority in Australia compiled for Infrastructure
list (2013), identified at least 16 projects of Australia in March 2013. An overwhelming
significance, either at threshold level or ready driver of this failure was identified as the
to proceed in a budget range of $20bn+. effectiveness of Project Governance – and a
The majority of these projects have strong significant sub-set of this failure, was seen as
business cases and positive economic a failure to adequately measure or manage
impacts. Project Value.

In addition the priority list identifies over 55 A wide range of reports have made strong
projects in total with a combined project value recommendations around resolving some of
between $80bn and $90bn. the root causes of major projects failure –
including Infrastructure Australia’s National
This list indicates that Australia faces a major Plan – across a number of remedies including
infrastructure backlog – especially if these better funding models and stronger
projects represent larger and more complex governance.
undertaking.
Major projects are a challenging complex
Yet too often projects that seek to address beast to tame – and understanding
this demand fail drivers of value is even more challenging
Even with more sophisticated methods of Despite the best efforts of considerably
project delivery and the clear social and qualified practitioners, it is a challenging
economic benefit for the country, it is widely process to construct a project that delivers
evident that too often those major projects strong economic and social impact, as well as
fail. strong financial outcomes for those involved
as suppliers or partners.
It is not difficult to point to examples of large
scale infrastructure projects that have run A document of considerable importance is the
over-time, over-budget, or do not ultimately final, detailed “business case”. Although a
meet the needs of stakeholders. significant amount of effort goes into the
business case or original “commercial plans”
for any given infrastructure project, these
cannot always deliver the required detail to
provide an accurate roadmap for the ultimate
implementers of the project.

February 2014 © SPP 2


Value Drivers for Major Projects

Current investment management standards


Identifying project value in business cases
provide a valuable starting point
A report cited from Infrastructure Australia on
Structures for review and analysis in the
Project Governance presented findings from a
investment management life-cycle are already well
survey that was conducted on infrastructure
established across most levels of government.
projects in Australia that failed to meet their
baseline time, cost and quality objectives. They provide critical steps and create valuable
Some key results from the report are: output which is an essential element in
• The report identified that “the business case establishing an infrastructure project business
is generally accepted as being the place case. For example in Victoria, a number of tools
where the benefits and value of a project are are used including the Investment Logic Map, the
expressed”. Benefit Management Plan and the Strategic
• “69% of respondents identified that the Options Analysis process.
business case is the correct reflection of the
value to be delivered”. These tools build a profile of the project during the
• 32% of respondents then drew a distinction planning phase to: 1) Best understand the core
between project deliverables and value rationale for the investment; 2) The way in which
delivery, that benefit can be captured; and 3) The analysis
• 70% believe that project value should be a of options for delivering the outcome. These
success criteria. methods are highly useful and should be
• The report suggests that KPI’s around incorporated in any sound project-planning
project value clearly belong in the domain of process.
project governance.
By their nature these tools are strategic and
What’s not clear from this report, is how Senior relatively high level. The rigour required to
Project Executives should go about understand the value delivered on a major project
understanding “Project Value” given the once the strategic business case has been signed
constraints of the classic business planning off is far deeper and requires some additional
process. thinking.
Value drivers – Hospital (indicative)
Exhibit 1: Value Drivers – Hospital (indicative)
Fees Procedure type Case mix

Capabilities

Fee tables
Research Regulation
fees
Negotiation
Program fees # Patient events

Income # Beds

Cash # Facilities
Staff
OpEx
Expense Consumables

CapEx Maintenance
NPV Case mix

Size
Benefit* * Indirect social , # Patient Events
environmental & # Staff
Indirect Economic broader economic Design Efficiencies per
Value/Benefit benefits
patient event
(total score) Cost Market Salary
conditions
Staff type
Environmental
Measured on an Land value
index based on EBA
difficulty and
Index (points) challenge in
Social quantifying $
impact of many of
these variables

Strategic
Source: SPP IP

Annual PPP summit - Understanding value drivers for major projects v1


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Value Drivers for Major Projects

February 2014 © SPP 3


Value Drivers for Major Projects

Some of the key questions that can be better Value driver analysis has become an important
answered include: foundation of strategic planning, encouraging
management to focus closely on growth and/or
• What are the specific things that, if I get optimisation strategies and helps to
them right & control them properly, will understand the returns from specific
significantly lever-up the value-based investment projects. The approach is not
outcome from the project? uncommon in mining project assessments.
• How do I identify size and manage these A good example of a value driver analysis which
tasks and/or activities? derived value for a telecommunications
company in the USA which identified new
Value-driver analysis takes this one step services and premium pricing as a key driver of
further value. As a result of this analysis, around 40%
of planned developed business projects in one
The value-driver concept was first developed
business unit were discontinued and sales-
by DuPont over a century ago.
force expansion plans were completely revised
It extends basic cash-flow analysis to allow after discovering how much value they would
companies to make both major strategic and actually destroy. The impact of this change was
everyday operating decisions – predominantly a 240-260% potential value increase in each
by understanding the biggest drivers of value business unit.
inherent in the business, whether they be
revenue or cost driven. Typically a value driver Identifying major project value and benefits
is an item that is controllable and that can A value driver is any variable that affects the
have strong impact on a financial or social value of the project, which is controllable by the
result. project team. These drivers must be organised
When the value driver concept is executed so that project leaders/manager can identify
well, management typically succeeds by which have the greatest impact on value and
focusing decision making and outcomes on assign responsibility for them.
the key drivers of value. Analysis of value For example, seating capacity was one of the
drivers typically starts with a “driver tree”, key focal measures for an infrastructure project
mapping out the major drivers of value on an that was building a new multi-purpose sporting
enterprise – in the previous case (page 3), for complex and stadium. In this case, key drivers
a hospital project. impacting optimal seating capacity can include
integration with existing public transport
Other sectors have used value-based
infrastructure, membership and subscription
management to great effect
sales to ensure seats are actually filled, or even
Businesses have been using the value driver seat comfort and spectator field of view.
tree analysis concept for many years. It
Assigning a team member to manage these
provides a precise and unequivocal metric
KPI’s, can help the project deliver significantly
(often expressed as a Net Present Value)
greater value than if the outcomes were left to
around which organisations can be designed
a standard design consultation process.
and options for growth or change tested.

February 2014 © SPP 4


Value Drivers for Major Projects

Managing value drivers in major projects


The approach to undertaking value-driver The design team might focus on ensuring the
analysis on a major project is not dissimilar to project remains attractive to tenants and the
the approach used on a business. overall owner (whether government or private
sector proponent) and may also focus on
Key drivers of both revenue and cost, from an ensuring close consultation with potential
operational and a capital perspective, are customers, in order to maximise the chance
identified and broken down into their of securing tenants.
constituent parts. For some social, health,
and other types of infrastructure project, the By incorporating (not replacing) one more
non-quantifiable elements should also be detailed analysis tool in the project planning
considered – but in this case, an index might phase, controllable variables which drive
be used to quantify their ultimate impact on value and success in major projects can be
project outcome. readily identified.

Once the components are modelled, The results of a value-driver analysis will then
sensitivity analysis is used to see which of the uncover an important roadmap highlighting
“controllable” factors have the most areas upon which to concentrate in order to
significant impact on project outcome. From maximise project value. Although they are not
there – a set of management tactics can be always readily discernible, an analysis of this
put into place to ensure that these “drivers of type can significantly increase the chance of
value” are carefully managed for maximum project success. An example of the same
outcome. analysis that is applied to a Hospital project,
is provided below.
For example, on a major new industrial
project it may be critical that rents from
tenants are maximised. As a result, the
Project Director may decide to hire a
business-development executive to purely
focus on this as an outcome given how critical
this is to success.
Exhibit 2: Value drivers are the factors with maximum impact and controllability

5
5
February 2014 © SPP 5
Value Drivers for Major Projects

Value drivers are also not always readily Next steps to capitalise on using value-
discernible- they require an investment of based management on your major project
considerable time and energy to
The next step to take this approach further is
recognise. However an initial framework of
to ask some questions:
financial (cash), economic, social,
environmental and strategic value-drivers Think about your key performance indicators
should form a basis to be able to begin or value-based metrics and how they will be
identifying factors and their impact on the achieved.
overall value or benefits of a project. It is essential to consider what factors impact
on your project’s value-based outcomes and
Considering and quantifying both the how best to achieve each outcome. Identifying
direct cash benefit and a broader range of the “how” is likely to be an iterative,
benefit themes (indexed and weighted consultative process that would require
appropriately), will provide a significant stakeholder engagement. However,
comprehensive and quantitative analysis this may actually be the most important part
of the overall project’s ability to deliver on of the exercise!
objectives.
Consider using the value-driver tree
Each of these themes should be broken framework to review your project.
down into its component and sub- Consider whether your project is focused on
component elements to the point where the key elements that deliver the most
an individual component is a finite significant value. If there are key value-drivers
element of the project. that the project is not addressing, consider
what measures and steps need to be taken to
For example, the cash benefit of an
realign the project with those drivers.
infrastructure project is typically a function
of operational revenue and capital Track your performance against the value-
expenditure. In turn, operational revenue driver tree framework.
is made up of operational income and A regular review of progress and performance
expenses, and that income is likely to against the key value-drivers and overall
consist of rents and fees (e.g. membership output can be completed regularly. Best
or subscription fees). At this finest level of practice suggests that this should be
granularity, the value-drivers specific for quarterly, or as required by significant
each element will need to be considered. decision points.

February 2014 © SPP 6


Value Drivers for Major Projects

About SPP
Strategic Project Partners is a generalist When we deliver our projects,
strategy consulting firm. whether it’s a strategic study or the
We support General Managers on implementation of large-scale
difficult strategic and operational change, we focus on:
challenges. • Strong project management
Established in 2005, SPP has delivered • Clarity of outcome
successful outcomes for a broad range of
• An obsessive focus on project
commercial and government sector
benefits
clients.
• Robust, fact based analysis
As a result, we have strong relationships
with many businesses, from Top 50 listed • Simple communication
companies through to small enterprises. • Bringing experience to bear

About the authors Simon Wilkins


Consultant
Phil Noble
Simon Wilkins has worked with
Managing Partner corporate, not-for-profit and
Phil has a broad range public sector clients to develop
of experience in general business case and strategy work
management consulting, and also undertaken cost
as well as in line analysis and country-wide
management. operational reviews.
Phil started SPP with the aim of bringing Simon has a background in technology
good strategy and general management commercialisation and the biotech/pharma
practice to businesses with a minimum of industry, with extensive experience in business
fuss, and maximum impact. Phil has case development, technology/market/risk
worked in financial services, not for assessment and large-scale project management.
profit, transport & infrastructure and Simon also has over 7 years business
telco, and across strategy, corporate development and technical sales experience
development and major capital projects. working in both Europe and Australia.

Amber Anderson Contact us for more information


Consultant
Amber has worked in a wide-
Strategic Project Partners
range of both private and publicly Level 41, 120 Collins Street
listed companies for over 13 Melbourne, Victoria 3000
years, including as Corporate
Legal Counsel, IT Vendor Insigh
Manager and Commercial Phil Noble tInfluen
Manager. m 0438 000 200 Impac
ce
Amber brings significant experience in corporate and t 03 9669 6900 t
commercial advisory and negotiation, project e phil.noble@spp.com.au
management, procurement, business integration, vendor
management, franchising, major projects, information Practice Lead, Major Projects
technology over a variety of different industries.
February 2014 © SPP 7