Consultant's Corner: How To Create The Business Case For Effective Utility Management
By Dan Pitzler and Nick Pealy, CH2M HILL
The use of business case evaluations (BCEs) to make choices between competing investment alternatives is one of the 14 leading asset management practices defined in the McGraw-Hill study of asset management practices. According to the study, only a small percentage of water utilities currently use BCEs to justify the need to adopt asset management as a way to more effectively manage operations and determine whether existing assets need repair/replacement, despite the fact that 90 percent of advanced practitioners of asset management utilize this practice.
We believe one of the primary reasons for this trend is due to the perceived complexity of preparing BCEs — as well as a shortage of in house staff to perform them or the belief of many water utility leaders and staff that BCEs can’t inform or improve upon the professional judgment and expertise they currently rely upon to make important decisions. Nevertheless, case studies with utilities in America, Australia, and other countries have successfully demonstrated the inherent value of conducting BCEs to improve the effectiveness of their utility.
Preparing a sound BCE is not as overwhelming as some may think. As a matter of fact, internal staff can be trained on how to prepare a good BCE with a modest amount of training.
When considering how to conduct a BCE, we would offer eight elements for your utility to consider:
- Problem Description and Background: A thorough description of the problem to be addressed, including background and a history of the issue.
- Service Level: A description of the organization’s relevant adopted service levels, with an explanation of why those levels are not or will not be met if the problem at hand is not addressed.
- Project Description and Objectives: A project description focused on the technical and performance requirements which also incorporates objectives and desired outcomes of the solution required, rather than listing specific details of possible solutions.
- Options Considering (Including the Do-Nothing Option): A description of each option being considered, including design and performance characteristics of each. Options considered should always include a “do-nothing” option, which serves as a baseline for comparing alternatives. Organizations that utilize BCE methods on a frequent basis sometimes find that the do-nothing option is preferable to feasible alternatives because the costs, relative to the performance gains offered by alternatives, do not justify changing the status quo.
- Economic Analysis of Alternatives: A detailed economic analysis of each alternative that compares the net present value of each alternative. The best examples of BCEs capture direct financial costs (capital and operating costs), environmental costs, social costs, and risk costs. This approach is widely referred to as “triple bottom line” analysis. If the analysis does not require a full triple bottom line analysis, it should still consider direct financial and risk costs.
- Non-Monetary Considerations: A description on non-monetary considerations that are relevant to the decision between alternatives. These could include specific social policies adopted by the organization, difficult to quantify environmental impacts, or such things as aesthetic benefits of each alternative.
- Recommendations: A comparison of the key performance characteristics of each alternative, comparative quantifiable cost and benefits of each, and a comparison of other factors considered in arriving at a recommendation. These comparisons are often presented in a tabular format to make comparison simple.
- Follow Up Actions including Budget and Schedule: A description of follow up actions, the budget and schedule for the chosen alternative, and other “to do’s”. This section verifies clarity and specificity on which option was selected; scope; schedule and budget; and other expectations for how the project is executed.
The process explained above is especially beneficial for large projects; however, the same process could be scaled for use on smaller projects as well. BCEs help utilities use fact based analysis of alternatives, including the quantification of risk costs, full life cycle costs of alternatives such as future O&M, repair, replacement and disposal costs, as well as non-monetary costs.
Don’t be afraid to think outside of the box to determine the best and most effective alternative or choice to help your utility operate at its peak performance.
Dan Pitzler joined CH2M HILL in 1985 and has nearly 30 years of experience helping clients create value by making better decisions about infrastructure assets and managing risk. He works for both private and public sector clients in multiple industries, with particular expertise in business case development, risk assessment and management, monte carlo simulation, facilitation, and decision analysis. In executing this work, he develops sophisticated financial models that incorporate environmental and social impacts, develops and facilitates structured decision and risk management processes with stakeholder groups, and applies decision tools such as scenario planning, influence diagrams, decision trees, strategy tables, and multi-objective decision analysis.
Nick Pealy is Senior Consultant for Asset Management and Reliability at CH2M HILL. Nick joined CH2MILL in September, 2012, after spending nearly 24 years with the City of Seattle (almost exclusively in the utilities) as a director and senior utility executive responsible for finance, human resources, information technology, and operations and maintenance (which he was responsible for more than 5 years). He has extensive experience in the water, wastewater, Stormwater, and solid waste industries, with expertise in finance, human resources, organizational and employee development, technology, strategic planning, asset management, operations planning management, and emergency management. Nick lives in the Great Northwest, and spends most his time on Whidbey Island when he isn’t traveling.
Image credit: "water supply," © 2006 recoverling, used under an Attribution 2.0 Generic license: http://creativecommons.org/licenses/by/2.0/deed.en