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How Effective Project Planning & Implementation
Impacts an Operating Company’s Market Value
Chris Luther
Camargo Associates, LLC
www.CamargoAssociates.com
TM

© 2013-2014. All Rights Reserved
COMPELLING STATEMENTS
►

Many define those ambitions with compelling statements like:

“Our capital effectiveness must
be in the top quintile.”
“Our capital predictability
must be in the top quintile”
“There will be no accidents
or incidents, period”

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
FOCUSING ON

“Capital Effectiveness”
Equals
Project Actuals
Industry Benchmark
(Where 1.0 is the Average)

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL EFFECTIVENESS

Quintiles

Capital Plan
$

Capital
Effectiveness
Measurement
(SAY)

# Of Companies
Benchmarked
(1000 SAY)

5th

1.6 B

1.6

50

1.2

50

1.0

50

0.9

50

0.7

50

4th
3rd

1.0 B

2nd
1st

.7 B

Capital Effectiveness

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
W HAT DOES THIS MEAN?

►

If capital effectiveness = 1.6
► 60% more costly than “peer” group

►

If capital effectiveness = 0.85
► 15% less costly than “peer” group

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT W ORK PROCESS
Planning

Execution
Project Authorization

1

2

3

4

4

5

Concept

Options

Preliminary
Design

Detail
Engineering

Construction

Start-Up

Procurement
2%

1½%

3.5%

93%

Effective Project Cost Distribution (Normal Distribution)

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
WHAT IS THE MAIN THING?

►

Using Interviews

►

Complex Problem Analysis

►

System Dynamics Analysis

►

Lean Analysis
CONCLUSION

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
OWNER I NPUT & D ECISION MAKING
Quality Of
Owner’s Input
And Decision
Making

Reasons for NOT Achieving Top Quintile Performance
TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
S YSTEM M ODEL C OMMUNICATION
Require
detailed
information
on decisions
timing

Current
priorities
trivialize
projects

Effective
re-occurring
communication
between
groups

My other
accountabilities
keep me busy

Understanding
the of impact
of poor
communication

I believe my
input is critical

If work slows
down we’ll have
more time

I actively
lead in project
communication

No-one
holds me
accountable
Lack of
corporate
funding to
work on
projects

Individual and/or
group who is
responsible

TM

Top Quintile
Performance

Communication
metrics should
be in place

Pre-existing
corp.
alignment is
strong
Corporate
Strategy

I will have to
win them over
with a reluctant
engineering
group

Fear of
decision
failing

I maintain a
strong, trusting
relationship with
project group

Contractual
issues

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
MAIN ISSUE

“Lack of critical decision
making and obtaining critical
information to co-ordinate and
create synergy with fast
moving decisions”

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT W ORK PROCESS

►

Quality of Critical Owner’s Input / Decisions

1

TM

2

3

4

4

5

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT W ORK PROCESS

Waves of Critical Owner’s
Input and Decisions
3
1
TM

4

4

5

2

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT W ORK PROCESS
►

Quality of Critical Owner’s Input / Decisions

1

2

3

4

4

5
Cost and
Schedule
Growth

1%

0.5%

2%

Grows from 93% to 110% or more

Project Cost Distribution 4th and 5th Quintile Owners

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
PREMISE:
► “No

one knows their business better than the owner”

►

Major owner’s sources of input / knowledge
Business Unit
Operations / Production
Maintenance
Engineering
Projects

Health, Safety, Environment
More

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
IT TAKES TWO…
Owner’s Expertise

TM

Partner’s Expertise

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
“ THE DOUBLE BET”

Hi

Bias
Solution

TOTAL JOINT
SOLUTION

Low

Low Value

One Sided
Solution

Low

Company
Owner
Understanding
Of What They
Need

Hi

Partner Understanding of What the
Operating Company Needs

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
New
Knowledge
Innovation
Technology
Sharing

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
OWNER’ S CRITICAL I NPUT

►

►

P&IDs

►

Process Description

►

Process Flow Description

►

Control Strategies

►

TM

Scope of Work

Hazard Review

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
DIFFICULTY GETTING OWNER’ S I NPUT

► Lack

of Resources

► Lack

of Time

► Uptime
► Urgent

vs. Important

► Junior

vs. Senior
Expertise

► Poor

Engagement

► Wasteful

TM

Meetings

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
HOW DOES “ NETPOINT” H ELP?
► More

detailed scheduling around input / review

► Allows

smaller meeting schedules to break down details

► “Slicing the

Salami”

►

Process

►

Hazards

►

PFDs

►

Control & Safety

►

P&IDs

►

Others

► Improves

TM

process safety input / reviews

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
FINANCIAL I MPACT TO COMPANY “ A”
Real Company “A”

Market Cap

$13.4 B

Revenue

$16.6 B

Net Income

$1.3 B

Capital Project Spending

$ 1.2 B

PP&E

$ 4.4 B

Depreciation

$ 0.5 B

Share Price 1-1-14
# of Shares Outstanding
Average PE

TM

$90
149 MM
10.2 x

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT

DELIVERY

I MPROVEMENT

►

Using CAPM – Capital Asset Pricing Model to determine the
Intrinsic value of the stock assuming a “capital effectiveness” of 1.4

►

Reassessed the value using a capital effectiveness of 1.0 changing the
capital spending over a two year period (2014 thru 2015)
►

►

Analysis variables:
► Capital Spending
► Free cash flow
► Depreciation
► Earnings

Assumptions of the future performance based on past:
►

►
►

TM

Revenue Growth of 10% per yr. (conservative) over 10 years,
Then a terminal growth of 4% (very conservative) for the next 10 years
NPV of 12%

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
CAPITAL PROJECT

DELIVERY

I MPROVEMENT

Company "A"
200
180
160
140
120

Current Stock Price

100

183

80

144

Intrinsic value (1.4)
Intrinsic value (1.0)

60
90

40
20
0

Current Stock Price Intrinsic value (1.4) Intrinsic value (1.0)
TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
IMPACT
►

Company “A”- Private sector
► Capital Expenditures Savings over 20 years
► - $ 26.4 B
► NPV (12%) -$ 17.2 B

►

Public Sector – Benefit Cost Ratio
► $ 1.2 B capital spending ( annual)
►
►

TM

NPV (4%) -$ 18.5 B Savings
BCR = 1.34, means that the benefits
outweigh the costs by 34%

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
IT TAKES TWO…

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
Groups of
Knowledge
Coming
Together

TM

© Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
How Effective Project Planning & Implementation
Impacts an Operating Company’s Market Value
Chris Luther
Camargo Associates, LLC
www.CamargoAssociates.com
TM

© 2013-2014. All Rights Reserved

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Camargo Associates, LLC

  • 1. How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value Chris Luther Camargo Associates, LLC www.CamargoAssociates.com TM © 2013-2014. All Rights Reserved
  • 2. COMPELLING STATEMENTS ► Many define those ambitions with compelling statements like: “Our capital effectiveness must be in the top quintile.” “Our capital predictability must be in the top quintile” “There will be no accidents or incidents, period” TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 3. FOCUSING ON “Capital Effectiveness” Equals Project Actuals Industry Benchmark (Where 1.0 is the Average) TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 4. CAPITAL EFFECTIVENESS Quintiles Capital Plan $ Capital Effectiveness Measurement (SAY) # Of Companies Benchmarked (1000 SAY) 5th 1.6 B 1.6 50 1.2 50 1.0 50 0.9 50 0.7 50 4th 3rd 1.0 B 2nd 1st .7 B Capital Effectiveness TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 5. W HAT DOES THIS MEAN? ► If capital effectiveness = 1.6 ► 60% more costly than “peer” group ► If capital effectiveness = 0.85 ► 15% less costly than “peer” group TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 6. CAPITAL PROJECT W ORK PROCESS Planning Execution Project Authorization 1 2 3 4 4 5 Concept Options Preliminary Design Detail Engineering Construction Start-Up Procurement 2% 1½% 3.5% 93% Effective Project Cost Distribution (Normal Distribution) TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 7. WHAT IS THE MAIN THING? ► Using Interviews ► Complex Problem Analysis ► System Dynamics Analysis ► Lean Analysis CONCLUSION TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 8. TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 9. TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 10. OWNER I NPUT & D ECISION MAKING Quality Of Owner’s Input And Decision Making Reasons for NOT Achieving Top Quintile Performance TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 11. S YSTEM M ODEL C OMMUNICATION Require detailed information on decisions timing Current priorities trivialize projects Effective re-occurring communication between groups My other accountabilities keep me busy Understanding the of impact of poor communication I believe my input is critical If work slows down we’ll have more time I actively lead in project communication No-one holds me accountable Lack of corporate funding to work on projects Individual and/or group who is responsible TM Top Quintile Performance Communication metrics should be in place Pre-existing corp. alignment is strong Corporate Strategy I will have to win them over with a reluctant engineering group Fear of decision failing I maintain a strong, trusting relationship with project group Contractual issues © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 12. MAIN ISSUE “Lack of critical decision making and obtaining critical information to co-ordinate and create synergy with fast moving decisions” TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 13. CAPITAL PROJECT W ORK PROCESS ► Quality of Critical Owner’s Input / Decisions 1 TM 2 3 4 4 5 © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 14. CAPITAL PROJECT W ORK PROCESS Waves of Critical Owner’s Input and Decisions 3 1 TM 4 4 5 2 © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 15. CAPITAL PROJECT W ORK PROCESS ► Quality of Critical Owner’s Input / Decisions 1 2 3 4 4 5 Cost and Schedule Growth 1% 0.5% 2% Grows from 93% to 110% or more Project Cost Distribution 4th and 5th Quintile Owners TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 16. PREMISE: ► “No one knows their business better than the owner” ► Major owner’s sources of input / knowledge Business Unit Operations / Production Maintenance Engineering Projects Health, Safety, Environment More TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 17. IT TAKES TWO… Owner’s Expertise TM Partner’s Expertise © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 18. “ THE DOUBLE BET” Hi Bias Solution TOTAL JOINT SOLUTION Low Low Value One Sided Solution Low Company Owner Understanding Of What They Need Hi Partner Understanding of What the Operating Company Needs TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 19. New Knowledge Innovation Technology Sharing TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 20. OWNER’ S CRITICAL I NPUT ► ► P&IDs ► Process Description ► Process Flow Description ► Control Strategies ► TM Scope of Work Hazard Review © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 21. DIFFICULTY GETTING OWNER’ S I NPUT ► Lack of Resources ► Lack of Time ► Uptime ► Urgent vs. Important ► Junior vs. Senior Expertise ► Poor Engagement ► Wasteful TM Meetings © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 22. HOW DOES “ NETPOINT” H ELP? ► More detailed scheduling around input / review ► Allows smaller meeting schedules to break down details ► “Slicing the Salami” ► Process ► Hazards ► PFDs ► Control & Safety ► P&IDs ► Others ► Improves TM process safety input / reviews © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 23. FINANCIAL I MPACT TO COMPANY “ A” Real Company “A” Market Cap $13.4 B Revenue $16.6 B Net Income $1.3 B Capital Project Spending $ 1.2 B PP&E $ 4.4 B Depreciation $ 0.5 B Share Price 1-1-14 # of Shares Outstanding Average PE TM $90 149 MM 10.2 x © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 24. CAPITAL PROJECT DELIVERY I MPROVEMENT ► Using CAPM – Capital Asset Pricing Model to determine the Intrinsic value of the stock assuming a “capital effectiveness” of 1.4 ► Reassessed the value using a capital effectiveness of 1.0 changing the capital spending over a two year period (2014 thru 2015) ► ► Analysis variables: ► Capital Spending ► Free cash flow ► Depreciation ► Earnings Assumptions of the future performance based on past: ► ► ► TM Revenue Growth of 10% per yr. (conservative) over 10 years, Then a terminal growth of 4% (very conservative) for the next 10 years NPV of 12% © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 25. CAPITAL PROJECT DELIVERY I MPROVEMENT Company "A" 200 180 160 140 120 Current Stock Price 100 183 80 144 Intrinsic value (1.4) Intrinsic value (1.0) 60 90 40 20 0 Current Stock Price Intrinsic value (1.4) Intrinsic value (1.0) TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 26. IMPACT ► Company “A”- Private sector ► Capital Expenditures Savings over 20 years ► - $ 26.4 B ► NPV (12%) -$ 17.2 B ► Public Sector – Benefit Cost Ratio ► $ 1.2 B capital spending ( annual) ► ► TM NPV (4%) -$ 18.5 B Savings BCR = 1.34, means that the benefits outweigh the costs by 34% © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 27. IT TAKES TWO… TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 28. Groups of Knowledge Coming Together TM © Camargo Associates, LLC. All Rights Reserved. | How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value
  • 29. How Effective Project Planning & Implementation Impacts an Operating Company’s Market Value Chris Luther Camargo Associates, LLC www.CamargoAssociates.com TM © 2013-2014. All Rights Reserved