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by PowerAdvocate

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[Whitepaper] How to Approach Utility Capital Project Delivery Model Optimization

April 14, 2017 at 11:01 AM / by Christine Oumansour & Andrew Jean-Louis

Maintaining profitability in a rapidly fluctuating market environment is a challenge for any firm. For utilities, structuring a Capital Program Office to meet the specific needs of projected workload is a key success factor. Achieving the optimal Delivery Model requires considering a wide range of factors – and a significant investment of time and resources. Before refining an existing or transitioning to a new Delivery Model, it pays to first understand the transitional costs, value, and ongoing savings opportunities.

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Understand Transitional Costs

Investment is measured as the expected cost requirements for transitioning to the optimal model from the current state. The main transitional costs typically consist of:

  • Hiring. As new skillsets are required, or additional volume of work is planned to be brought in house, new personnel will need to be brought on board, including recruiting, onboarding, training, and additional overhead costs
  • Severance. Costs associated with ensuring that the organization is right-sized for the expected portfolio of projects
  • Productivity Loss. The additional third party support needed to support the potential loss of productivity, and time lag, between internal personnel requirements and the ability to fulfill those requirements

Model Potential Transition Approaches

Depending on the particular situation, it will be important to model potential transition approaches to determine what the most cost-effective option may be. For example, in the transition from fully outsourced to fully insourced, it may be more cost-effective to transition more slowly and build up internal capabilities and functional processes over time to mitigate some of these costs. Ultimately, the most cost-effective transition approach will be unique to the organization’s specific situation and will depend on multiple factors. 

Quantify Expected Cost Savings

Ongoing cost savings from the new delivery model drive value and return on investment (ROI) once the transition period has concluded. Generally, a transition should be considered financially viable if the expected operational cost savings outweigh the initial transition costs and will deliver a positive ROI.

In reality cost is often the driving factor for an organization’s decisions around their selected Delivery Model. Quantifying the expected cost savings that may be achieved by utilizing one Delivery Model over another requires careful consideration of a wide range of cost drivers, including:

  • Internal headcount and salary requirements
  • Third party markup fees
  • Potential for underutilization of internal personnel
  • Projected volume and level of certainty associated with future pipeline of work
  • Cost associated with owning vs allocating project risks
  • Party or parties best positioned to execute quality work efficiently

Capture all the Relevant Data

All of these factors should be analyzed based on the projected volume of work, including various scenarios accounting for increases or decreases in those projections. Due to the inherent quantity of variables and assumptions required to make reasonable cost estimates for any given model, it is usually necessary to develop a robust scenario model in order to capture all of the relevant data and create a comprehensive comparison.  

For additional insight into optimizing your Delivery Model, read our whitepaper Capital Program Structure and Delivery Approach for Utilities. This paper lays out a three-tiered structure for identifying opportunities within a Capital Project Organization, reviews a strategy for successfully implementing that transition process, and discusses several industrywide best practices for executing an organizational transition.

 

This is first in our series of posts on optimizing the value of utility Capital Program Offices lead by PowerAdvocate's team of Capital Project consultants.

About Our Capital Projects Consulting Team 

PowerAdvocate's Capital Projects consulting practice helps energy clients plan, source, and execute large, complex capital portfolios and projects across a wide range of industries. From helping design organizational approaches, leveraging market data to estimate and forecast project costs, procuring and negotiating large contracts, and implementing sophisticated risk-reward programs, the practice has added value to our clients' projects across North America, Europe, and the Middel East.

Read our Capital Projects blog posts: www.costinsights.com/topic/capital-projects 

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CS Whitepaper Cover Thumbnail 170405.jpgWant to know what it takes to optimize a Capital Project Delivery Model?

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