Portfolio Optimisation
- 1. www.advisian.com Portfolio Optimisation An overview Chris Lovelock OOGC Muscat 2 December 2018
- 2. The need High value portfolio management Optimization and the efficient frontier Tools and Delta-MCA 01 02 03 04 Portfolio Optimization
- 3. The need Companies are focused on extracting maximum value from their capital - need to make every dollar count and do more with less Finite funds Increasing demand for returns Returns vs. asset needs + + =
- 4. The need They seek: • Business value in the management of an aging asset • To balance financial projects against non-financial projects within a finite budget whilst meeting shareholder expectations to see a return on their investment • A portfolio of projects that each demonstrate their merits for selection • Assurance that the portfolio will deliver the promised value
- 5. High-value portfolio management Characteristics of creating business value • The capital approval process is well defined and understood. • Each project clearly and consistently defines the benefits to be delivered in line with the business strategy. • Portfolio optimisation is applied. • Customised portfolios ensure changing needs can be managed in a controlled manner. • The organisation shifts from project metric targets to delivering strategic value from the portfolio.
- 6. Portfolio Optimization Introducing the Efficient Frontier 0% 20% 40% 60% 80% 100% 0 10 20 30 40 50 60 70 StrategicValue Capital Spend Efficient Frontier The ‘Efficient Frontier’ of a particular group of projects shows the maximum value that can be extracted for any given capital spend Optimisation gives best ‘bang for buck’ Our example portfolio: • $65M of capital projects • $51.3M possible NPV • 283 possible risk reduction points
- 7. BUT we only have a budget of $20M With this budget we can deliver: • $20M of capital projects • 70% of the strategic value which equates to… • $30.7M NPV and • 159 risk reduction points Portfolio Optimization The ‘Optimised’ portfolio 70% of the value for of the spend31% 0% 20% 40% 60% 80% 100% $- $10 $20 $30 $40 $50 $60 StrategicValue Capital Spend Millions Optimised Portfolio
- 8. BUT the boss has 3 CRITICAL projects they ‘really’ need to do this year Thus, we force these 3 projects in and re-run the optimiser: • $20M of capital projects • 50% of the Strategic value which equates to… • $27.7M NPV and • 110 risk reduction points Portfolio Optimization Force-in projects 25% less value for the same spend 0% 20% 40% 60% 80% 100% $- $10 $20 $30 $40 $50 $60 StrategicValue Capital Spend Millions Agreed Portfolio
- 9. 1. Forcing projects into/out of portfolios destroys value (but is sometimes necessary) 2. We could have achieved similar business outcomes with half the capital spend. Portfolio Optimization Retaining value Consider carefully before overriding the optimiser 0% 20% 40% 60% 80% 100% $- $10 $20 $30 $40 $50 $60 StrategicValue Capital Spend Millions 25% value lost through forcing projects in/out $10M extra capital required
- 10. Portfolio Optimization toolkit • A tried and tested portfolio optimisation and value management methodology backed by a full suite of ‘how to’ policies and procedures. • Portfolio management audit tool to systematically appraise the current organisational maturity in the area of portfolio and projects management. • Specialist in house tools (e.g. DELT∆-MCA which allows for semi-quantitative optimisation of portfolios and exploration of the sensitivity of project selection from business driver changes). • Extensive knowledge from working to deliver business value from project portfolios.
- 11. Portfolio Optimization toolkit Customized constraints Dynamic ‘slider’ bars Scenario analysis Delta-MCA an in-house tool: Supported by detailed, easily extracted data sets
- 12. Portfolio Optimization Outcomes Planning • Clarity of business drivers for capital selection • Control of the balance between risk reduction and financial projects in the portfolio • Improved generation of project ideas for potential consideration in the portfolio • The portfolio only contains clearly justified projects that demonstrate their merits
- 13. Portfolio Optimization Outcomes Delivery • Portfolio level tracking of progress and spend • Ability to adapt the portfolio to respond to the changing business environment and emerging needs • Better assurance in delivering the capital plan and achieving the benefits • Senior management team appreciation of the value of the capital plan • Less management distraction from capital surprises • Attraction and retention of high calibre personnel • Visibility of forecast and delivered benefits from the capital plan • Clarity/visibility of risks within the portfolio that apply at the business level
- 14. Portfolio Optimization Outcomes Outcomes • Ability to demonstrate to stakeholders an improving risk profile of the business • Ability to attract capital to the business Planning Delivery Outcome
- 15. • Delivery of value becomes the key measure of success • Customised portfolios – to retain value and allow rapid response to emerging needs • Taking the journey to improve capital effectiveness • Case studies High Value Portfolio Optimization Further discussion
- 16. Do you experience any of these? • Difficulty reaching agreement on the make up of the portfolio • Misalignment of corporate and plant level expectations • Frequent changes to the portfolio and project scopes • Project teams finding it difficult to get buy-in for their project • Weak generation of project ideas • Capital budget underspend and carry-over • Capital surprises and management distraction away from other core activities
- 17. For more information CHRIS LOVELOCK– Improve Contract Manager E: chris.lovelock@worleyparsons.com M: +61 415 129 105 STEPHEN WOLSELEY– Business Development Manager, Oman E: stephen.wolseley@worleyparsons.com M: +968 9649 8282
- 18. DISCLAIMER This presentation has been prepared by a representative of Advisian. The presentation contains the professional and personal opinions of the presenter, which are given in good faith. As such, opinions presented herein may not always necessarily reflect the position of Advisian as a whole, its officers or executive. Any forward-looking statements included in this presentation will involve subjective judgment and analysis and are subject to uncertainties, risks and contingencies—many of which are outside the control of, and may be unknown to, Advisian. Advisian and all associated entities and representatives make no representation or warranty as to the accuracy, reliability or completeness of information in this document and do not take responsibility for updating any information or correcting any error or omission that may become apparent after this document has been issued. To the extent permitted by law, Advisian and its officers, employees, related bodies and agents disclaim all liability—direct, indirect or consequential (and whether or not arising out of the negligence, default or lack of care of Advisian and/or any of its agents)—for any loss or damage suffered by a recipient or other persons arising out of, or in connection with, any use or reliance on this presentation or information.
Editor's Notes
- #17: Delays in approval of projects Rework in the early stages of the project – and sometimes also later in the project