Capital Investment: How Not to Build the Titanic

When you are facing a major capital investment, it's possible to save hundreds of millions of dollars Focus on capital productivity, not just the budget and schedule To do that, raise questions early on about market entry, customer focus, and flexibility Then check the interfaces between major components and adjust the bias for costs versus risk In the early 1990s, one of the world's leading industrial companies was considering the construction of a new plant which was to cost well in excess of half a billion dollars. However, senior management and the board were uncomfortable with the project's overall economics and decided to fundamentally rethink the investment. Two years later, the plant was opened at a capital cost of $350 million, 40 percent below the estimate first proposed. Capacity is the same as originally planned, but production unit cost is 30 percent lower than the company's other operations and control over product quality - a key factor in customer satisfaction - is considerably better. Moreover, the plant is more compact and much simpler to operate and maintain. To achieve all this, no revolutionary technology was needed, nor any change in product mix specifications. What did change was management's attitude and approach to the project based on its recognition that more value could be extracted. Management's insight and determination can dramatically improve the productivity of capital spent on major projects. The key is an approach called clean sheet capital redesign (CSCR). CSCR's aim is simple: to extract maximum economic value from a project. Starting with a clean sheet, management must focus the project team on finding ways to do that. Often it will require a fundamental redesign of the project proposals, which in turn requires a fundamental shift in project-management processes. A huge prize at stake Chief executive officers in capital-intensive industries recognize that capital productivity can be the key to profitable growth. Yet large capital investments, particularly those in industries that are cyclical or have long planning horizons, rarely achieve their potential. With dismaying frequency, budgets and schedules blow out, unforeseen events depress prices, and return on investment slides. Even when projects come in on budget, hindsight often reveals lost opportunities that have cost millions in terms of profit forgone. Once the project is completed, it is difficult to make amends: even the best plant manager cannot extract enough value from labor productivity to compensate for a poorly located, poorly designed, or gold-plated plant. Yet capital productivity has received relatively little attention. Apart from information technology advances such as computer-assisted design, many project teams still work in much the same way as they did in the 1960s and 1970s. This lack of focus on capital productivity is partly understandable: large projects come along intermittently; none is identical to any that has gone before; market, technical, and managerial discontinuities ensure that each new generation of equipment is different from the last; and, perhaps most important, competitive pressures are less keen before a project is built than they are after the money has been spent. It is a huge wasted opportunity. Closer attention to the design of investment projects by companies in capital-intensive industries can yield great improvements in capital productivity - improvements comparable in magnitude to those made in manufacturing through the quality revolution, and in service industries through process reengineering. Case studies of five investment projects around the world - a chemical plant, two mines, a mobile telephone network, and a timber plant - identified capital savings in the order of 15 to 45 percent through use of the CSCR approach. Potential to boost revenues and reduce operating costs was also recognized. …