maximizing value through good decisions and execution
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Maximizing value through good decisions and execution. March 28, 2011. Making and executing decisions in today’s business environment is a challenge. “Oh, if only it were so simple.”. The traditional approach to decision making is to advocate and sell a desired decision. Decision Review. - PowerPoint PPT PresentationTRANSCRIPT
Copyright © 2009 by Decision Strategies
Under no circumstances should this material be reproduced, stored in a retrieval system, or
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This document should be considered incomplete without the accompanying oral commentary and discussion.
COMPANY CONFIDENTIAL
MAXIMIZING VALUE THROUGH GOOD DECISIONS AND EXECUTION
March 28, 2011
Making and executing decisions in today’s business environment is a challenge.
2
“Oh, if only it were so simple.”
The traditional approach to decision making is to advocate and sell a desired decision.
3
“Here is the situation,now justify a decision.”
1) Situation Analysis is done2) Decision is proposed3) Assumptions are made4) Costs & Benefits are forecast5) Appropriate Discount Factor is used6) Business Case Analysis is worked7) Business Case is presented to Decision Makers
What can go wrongwith this approach?Why does it so often lead to a lack of buy-in, unresolved ambiguities, lingering uncertainties or frustrating analysis paralysis?
SituationAnalysis
Assumptions& Forecasts
DecisionProposed
DiscountFactor
ValueCalculated
DecisionReview
Decision Quality & Execution Quality Are Necessary To Maximize Value
• Good decision quality - best alternatives are selected.
• Good execution and operational quality - decisions are implemented well.
• Without good project execution quality, even good decisions are implemented poorly.
• Without good decision quality AND project execution quality, project financial performance will most likely be poor.
Deci
sion
Qua
lity
Execution and Operability
Poor
Good
Poor Good
Highest Value
Relying On Luck
Train Wrecks
Did The Right Thing Badly
Most Common Outcomes
Idea Scoping Strategic Develop FEL Implementation Decision Solution
Goes as plannedDisappointed Results
Delighted Outcome
Unplanned failures
Lucky Breaks
Ideation
Discovery & Framing with correct team
Stochastic Evaluation with valid Range Assessments
VOI, VOC,Hybrid Solution
Value Realization Planning, Resourcing, Commitment to the Decision
Schedule & Execution Optimization,Signposting, Value Realization
Failing to focus on value, recognized uncertainty downside
Activities Increasing Value
Activities Decreasing Value
TIME
VALUE
Making better decisions from the start coupled with stellar execution creates the greatest value for the enterprise.
Process industries need to follow a stage gate process incorporating good decision making and execution to maximize value and minimize risk.
OperationsExecutionSelect the Preferred Alternative
What are the Alternatives?
What is the Opportunity?
Generate Alternatives
Preliminary Scope for Each Alternative
Preliminary Implementation Plans
Assess Preliminary Value
Narrow and Select Alternatives
Refine Business Case
Define and Freeze Scope
Final Implementation & Execution Plans
Confirm Value and Commit to Business Metrics
Finalize Business Plan
Execute Consistent with Execution and Implementation Plans
Finalize Operating Plan
Execute Business Plan
Operate Asset
Monitor and Evaluate Performance
Adjust as necessary
Identify New Opportunities
Develop Frame• Strategic• Commercial• Business Case
Preliminary Assessment
Preliminary Overall Plan
Decision Management
Capital Project Planning, Execution and Control Management
Capital Financial Management
Integrated Decision Management™ Process Map
• Situational Perspective
• Governance
• Objectives
• Strategic Question
• Stakeholder Analysis
• Scoping Analysis
• Objectives Hierarchy
• Decision Hierarchy
• Strategy Map / Strategy Table
• Qualitative Assessment
• Influence Diagram
• Identify Subject Matter Experts
• Value Optimization
• Metrics Development
• Project Plan
• Staffing, Budget & Schedule
• Risk Reduction & Contingencies
• Optionality
• Tactical Decisions
• SME Assessments
• Decision Tree
• Decision Model
• Sensitivity Analysis
• Simulation
• Value of Control & Information
• Organizational Alignment
• Hybrid Strategy
• Communication • Metrics Tracking• Transfer to
Operations• Value Capture• Periodic Review• Learning &
Improvement• Exercise Options
Scal
ed “
fit-fo
r-pu
rpos
e”
Discovery& Screen
Opportunity
• Clarify Situation• Define Opportunity• Assess Value
Potential
OpportunityClear
ProcessSteps
Decision Makers
Implement & Monitor
Performance
• Resourcing• Project Mgmt.• Track Metrics
Fully Develop Selected
Alternative
• Optimize Strategy• Resource Plan• Schedule Project
Fund & Resource
Evaluationand
Agreement
• Assessments• Analysis Work• Key Insights
AppropriateFrame
Creation & Framing of
Alternatives
• Create Alternatives• Define Requisite
Evaluation• Identify Experts
StrategicDecision &Alignment
What needs to be
decided?
What choices do we have?
What is thebest
choice?
What's needed to
do it?
Do itwell.
8
The Decision Support Package (DSP) incorporates each of the process deliverables into a concise document for review.
©1996-2003 Decision Strategies, Inc. Includes materials ©1984-2003 Kenneth R. Oppenheimer
220
Introduction to Integrated Decision Management® for IT
DSDECISION
STRATEGIES
Benefits
OperatingExpense
CapitalExpense
15% WACC 10 Years
CorporateValue
TCO
DevelopmentFTEs
HW/SWTraining &Change Mgt
InventoryReduction Price of
CommodityTradingVolume
AdvantagePer Barrel
Acct/BusinessFTEs Reduction
TradingAdv Inventory
Adv
FTEs = $120k/yr
Maintenance
Support
Licensing
MomentumMomentum
EASyEASy Does ItDoes It
CannedCanned
Separate butSeparate butProcessedProcessed
Corporate Forecast
Greg - OperationsDale - Contracts
Jennifer - Trading Kyle – EASyAccounting, and Deb –
Commercial Support
Connie – IT Support
Connie – IT Support
Mark – Purchasing
Lisa – IT Devand Mark Purchasing
Lisa – IT Devand Mark Purchasing
John – Corp PMO ©1996-2003 Decision Strategies, Inc. Includes materials ©1984-2003 Kenneth R. Oppenheimer
253
Introduction to Integrated Decision Management® for IT
DSDECISION
STRATEGIES
Comparing “Canned” with “Separate but Processed” indicates even higher potential, with key uncertainties.
Canned vs Separate But Processed
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000Advantage per Barrel
Trading Volume
Development FTEs
Acct/Business FTE Reduction
Lifecycle
Inventory Reduction
Support
Price of Commodity
Maintenance
Licensing
One-Time Cost Avoidance
IT Cost Elimination
Go-Live
HW/SW
Training and Change Management
Thousands
Canned
1,699
Separate But Processed3,095
Canned vs Separate But Processed
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000Advantage per Barrel
Trading Volume
Development FTEs
Acct/Business FTE Reduction
Lifecycle
Inventory Reduction
Support
Price of Commodity
Maintenance
Licensing
One-Time Cost Avoidance
IT Cost Elimination
Go-Live
HW/SW
Training and Change Management
Thousands
Canned
1,699
Separate But Processed3,095
©1996-2003 Decision Strategies, Inc. Includes materials ©1984-2003 Kenneth R. Oppenheimer
195
Introduction to Integrated Decision Management® for IT
DSDECISION
STRATEGIES
The completed Strategy Table is a good format for communicating and comparing alternatives
Processed DailySeparate but
Processed
FixedLinked LiveLinkedCanned
AdaptedManualIntegratedEASy Does It
CustomizedIncludedStandaloneMomentum
Feature Customization
Integration with EASy
Integration with Other Commercial
Systems
Theme
©1996-2003 Decision Strategies, Inc. Includes materials ©1984-2003 Kenneth R. Oppenheimer
277
Introduction to Integrated Decision Management® for IT
DSDECISION
STRATEGIES
Even greater resolution may be displayed by using the entire Crystal Ball® Output
Cumulative Probability of NPV
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-8000 -6000 -4000 -2000 0 2000 4000 6000 8000 10000 12000 14000Thousands
Cum
ulat
ive
P
Separate But Processed.xlsCanned.xlsEASy Does It.xlsMomentum.xls
Cumulative Probability of NPV
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-8000 -6000 -4000 -2000 0 2000 4000 6000 8000 10000 12000 14000Thousands
Cum
ulat
ive
P
Separate But Processed.xlsCanned.xlsEASy Does It.xlsMomentum.xls
Understanding the Problem
Explanation of the Alternatives Evaluated
Value of Components
Risk-based Comparisonof Alternatives
DSP
9
The DSP also should include forward planning documents as well as project history
TargetAudiences
Executives
Middle Managers
Front Line
Investors
Customers
Partners
Key Messages
Objectives of the decision.Why change?
Impact of not changing.Options considered.
Key factors.
Process fordevelopment of
detailed implementationplans and involvementof each functional area.
MediaOptions
Executive speech.
Newsletters.
Town meetings.
Interactivequestioning and
processingto gain
understanding.
PerformanceMetrics
Level of Understanding
Resource commitment
Value Created
Cycle Time
Critical Sensitivities
Communication Plan
• Capital Projects Manager (Team Leader)• Planning - Business Analysis• Hardware Engineering Advisor• Software Engineering Advisor• Cost Engineer• DA Facilitator
Project Roles 45678910111213141516171819202122232425262728293031323334353637383940414243
A B C D E F G H I JIncome Statement, $000/yr. year 2003 2004 2005 2006 2007 2008 2009 2010System Benefits
One-Time Cost Avoidance 0 0 400 0 0 0 0 0IT Cost Elimination 0 0 280 0 0 0 0 0
System Benefits Total $0 $0 $680 $0 $0 $0 $0 $0
Business Process BenefitsCycle Time Improvement 0.00 0.00 100.00 100.00 100.00 100.00 100.00 100.00Cycle Time Advantage 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00Number of Products/yr 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00
Total Cycle Time Advantage - - 400,000 400,000 400,000 400,000 400,000 400,000
Business FTE Reduction - - 2,040 2,040 2,040 2,040 2,040 2,040 Business Process Benefits Total $0 $0 402,040 $402,040 $402,040 $402,040 $402,040 $402,040
System Operating ExpensesMaintenance (HW/SW) 0 0 700 700 700 700 700 700Support 0 0 600 600 600 600 600 600Liscensing 0 0 50 50 50 50 50 50Training 0 0 200 200 200 200 200 200 0 0 0 0 0 0 0 0Business User Costs 0 0 2550 2550 2550 2550 2550 25500 0 0 0 0 0 0 0 0
System OpEx Sub-total $0 $0 $4,100 $4,100 $4,100 $4,100 $4,100 $4,100
Shutdown CostsOne-Time Shutdown Costs (in dev) 0 0 0 0 0 0 0 0Shutdown Internal Resources (in dev) 0 0 0 0 0 0 0 0
Shutdown Costs Sub-total $0 $0 $0 $0 $0 $0 $0 $0
Patent Acceptance Delay CostPatent Delay 90 90 90 90 90 90 90 90Probability of Delay 0.100% 0.100% 0.100% 0.100% 0.100% 0.100% 0.100% 0.100%
Patent Acceptance Delay Cost $360 $360 $360 $360 $360 $360 $360 $360
Total Expenses $360 $360 $4,460 $4,460 $4,460 $4,460 $4,460 $4,460
Operating Margin ($360) ($360) $398,260 $397,580 $397,580 $397,580 $397,580 $397,580
Budget Forecast
Sept 15 Sept 22 Sept 29 Oct 6 Oct 13Option
Generation
Prioritization
Oct 20 Oct 27 Nov 3 Nov 10
Evaluation
Week of:
MeetingsOctober 28th
Decision Board Mtg
October 6th 7th
Offsite Team MtgSept 15th
Workshop
Selection
Adjust Model& Insights
Nov 17 Nov 24
Insights
Work Plan
Staffing
Budgeting
Detail Roles
Early November Decision Board
Mtg
Project Calendar
DSP
10
Decision Support Package Overview:We always start with the “Why” and “What we want”
CorporateValue
CostEffectiveness
H,S&EGoals
CapitalEfficiency
CycleTime
RevenueGrowth
ExpertiseRetention
ReservesReplacement
Operability FutureFlexibility
MarketCapture
1) Reminder of drivers for developing a new strategy:
2) Agreement on strategic objectives and likely tradeoffs:
11
Decision Support Package Overview:We need to know what we “can do” and work to make the strategies creative and doable.
3) Review of the policy decisions and the scope of alternatives considered:
• Exploration - focus areas vs. land-grab leasing• Hub Development - standardized hubs vs. fit-for-purpose hubs• Development Timing - fast track, staged or traditional• Production - standard technology vs. platform-of-future• Drilling Rigs - company rig vs. second leased rig• Gas Disposition - reinjection, HTL/LPG or LNG/LPG• Marketing - long term contracts vs. spot market
• Partnering opportunities• Shipping details for blended or segregated products• 3D Seismic purchase• Farm-in, Farm-out
• LoneStar Oil will explore and develop prospects in the country.• LoneStar will operate and meet H,S&E goals• LoneStar to meet Tier 1 levels of key benchmark metrics• LoneStar will comply with “no-flaring” regulations
HubDevelop.Exploration Develop.
TimingDrilling
Rigs
Key Decisions
ProductionStrategy Themes
Oil HubFocus
Big Gas Value
Flexible Options
Standard design
Fit-for-purpose design
Hub Area Focus
Land-grab leasing in all areas
• Fast track (2 years)
• Staged expansion
• Traditional (5 years)
Standard technol.
Platform-of-the-future
Company rig
Lease second rig
Gas Disposition
Reinject
HTL/LPG
LNG/LPG
MarketingPlan
Long term contracts
Spot market
12
Decision Support Package Overview:We need to know the uncertainties that impact the choices and gather good information from experts.
4) Overview of the evaluation model and sources of information:
GasReservesLNG
LPGHTL
MarketDemand
ContractSuccess
ReserveCertification
OtherExpenses
OperatingEfficiency
ProductionRate
Oil Hub Focus
Big Gas Value
Flexible Options
FiscalTerms
SalesVolume
FOB SalesPrices
Transport.Availability
GasQuality
TechnicalRisk
ShareholderValue
CapitalInvestment
StorageUpstream
GasPlant
OperatingExpenses
DiscountRate %
Hub
RevenuesDeal
Timing
OilProduction
OilPrices
OilReserves
List of Experts• • • • • • • • • • •
13
Decision Support Package Overview:We want to communicate insights on how value is created and where the risk lies.
5) Monetization of gas resources adds significant value, but all of the options stretch Lone Star’s risk tolerance.
∑ CapEx $ 8,520 $10,650 $11,400
Max Exposure $3,890 $4,519 $ 4,307
IRR%
NPV$(millions)
0
500
1000
1500
2000
2500
3000
3500
Oil Hub Focus Big Gas Value - LNG Flexible Options - HTL
18%$2,182
20%$3,179 17%
$2,877
RiskTolerance?
FinancialStrength?
14
Decision Support Package Overview:A comparison of stochastic outcomes is the only way to really judge one option from another.
6) Probabilistic evaluation suggests upside for LNG, but with significant risk.
Both strategies that monetize the gas resources dominate over the Oil Hub only.
The LNG upside is attractive to explore.
HTL has the highest expected value due to staged development and market flexibility.
15
Decision Support Package Overview:Which variables drive the opportunity and at what point would you choose something different.
7) Critical uncertainties for gas alternatives are “Deal timing” and “Contracts”.
HTL Flexible50 NPV = $2,182
Big Gas Value50 NPV = $3,179
1000 2000 3000 4000
Oil Reserves
Gas Reserves
Oil Pricing
Upstream CapEx
Hub CapEx
LNG (or HTL) Pricing
Gas Deal Timing
Hub Op. Efficiency
Gas CapEx
LNG Contract Success
LNG (or HTL) Demand
Transport Avail.
NPV ($ Billion)
Critical factor
Critical factor
Strategy-independent or highly correlated uncertainties.
16
Decision Support Package Overview:We always look for a hybrid strategy with counter-intuitive possibilities.
8) Value of Information or Control suggests a creative new option to explore LNG upside that also addresses the risk tolerance issue for Lone Star.
Major Uncertainties Clairvoyant Value Wizard Value Actions/Ideas Deal timing $ 67 M $ 87 M
Competitor could cement the dealDeal timing & contracts $ 67 M $ 244 M timing and secure
long termContract Prices $ 0 M $ billions contracts at
favorable prices.Capital Expenses $ 0 M $ billions Lone
Star could focus on strengthsOperating Efficiency $ 0 M $ millions in capital projects
and operations.
17
Decision Support Package Overview:By clearly identifying the highest value options each group can effectively manage their own strategy.
9) The strategy is actionable for each functional area and aligned around a winning business theme.
GasProcess
Resources Included
FacilitySize
Gas Marketing
Gas Group Plan
Transport Plan
Strategy Themes
LNG/LPG LNGAll gas in hub area plus 3rd party
300 MMCFD
Build LNG fleet
Fixed contracts
Each group will have their own specific actions which align with the selected business strategy.
HubDevelop.Exploration Develop.
TimingDrilling
Rigs
Key Decisions
ProductionStrategy Themes
Big Gas Value
Fit-for-purpose design
•Hub Area Focus
Traditional(5 years)
Platform-of-the-future
Lease second rig
Gas Disposition
LNG/LPG
MarketingPlan
Long term contracts
18
Decision Support Package Overview:Developing off-ramps and contingencies ahead of time minimizes value destruction later.
10) Strategic pathways and contingency options with critical decision points:
Big GasStrategy
3179
FavorableResponse
Big GasStrategy
3100LNG Deal
Flexible HT LStrategy
2900No Deal
Reinject GasExtendedNegotiations
Flexible HT LStrategy
2935No Deal
Explore LNGPartnership
The best strategy is a pathway that includes options and contingencies for each major barrier or opportunity that can be anticipated.
19
Decision Support Package Overview:A correct project frame provides the basis for faster follow on decisions.
11) Tactical decisions can be made quickly with the evaluation framework that has been developed for the strategy decision.
• Exploration - focus areas vs. land-grab leasing• Hub Development - standardized hubs vs. fit-for-purpose hubs• Development Timing - fast track, staged or traditional• Production - standard technology vs. platform-of-future• Drilling Rigs - company rig vs. second leased rig• Gas Disposition - reinjection, HTL/LPG or LNG/LPG• Marketing - long term contracts vs. spot market
• Partnering opportunities• Shipping details for blended or segregated products• 3D Seismic purchase• Farm-in, Farm-out
• LoneStar Oil will explore and develop prospects in the country.• LoneStar will operate and meet H,S&E goals• LoneStar to meet Tier 1 levels of key benchmark metrics• LoneStar will comply with “no-flaring” regulations
Decisions madebecome policy.
Decisions which were deferred become the focus for decision teams
20
Decision Support Package Overview:The DSP provides a quantitative and qualitative basis for execution of the plan.
12) Project management plan is being established:
• Resourcing and responsibility plan (RASI diagram)• Budget and schedule (GANTT chart)• Key metrics for tracking progress and results of the strategy
- defined data sources and method of gathering• Contingency plans and critical trigger points to take action• Review schedule to update key uncertainties and track metrics
21
TargetAudiences
Executives
Middle Managers
Front Line
Investors
Customers
Partners
Key Messages
Objectives of the decision.Why change?
Impact of not changing.Options considered.
Key factors.
Process fordevelopment of
detailed implementationplans and involvementof each functional area.
Decision Support Package Overview:Communication is critical to coherent actions.
MediaOptions
Executive speech.
Newsletters.
Town meetings.
Interactivequestioning and
processingto gain
understanding.
PerformanceMetrics
Level of Understanding
Resource commitment
Value Created
Cycle Time
Critical Sensitivities
13) Communication plan to gain understanding and coherent action:
22
“It must be considered that there is- nothing more difficult to carry out, - nor more doubtful of success,- nor more dangerous to handle,
than to initiate a new order of things.”
The Prince, 1513Niccolo Michiavelli
Last Thought