This post is one of an ongoing series of Access Water posts about asset management best practices. Read the first few and stay tuned for more asset management insights over the coming weeks.
McGraw-Hill Construction’s recently released study of asset management practices of US and Canadian water utilities, a CH2M HILL-sponsored research project, examined the extent to which water utilities have adopted 14 leading asset management practices, and which of these practices are of most value to implementers. One practice, the use of business cases (BCs) to make choices between competing investment alternatives, has proven to be an invaluable tool to best practice implementers of asset management. This was confirmed in case studies presented in the study, as well as in interviews with five leaders (also cited in the study) of best practices organizations.
Interestingly, the study indicates that BC methods have not been widely adopted by water utilities, although 90% of advanced practitioners of asset management are using this practice. This could be due to the perceived complexity of preparing BCs, a shortage of in house staff to perform them, or the belief of many water utility leaders and staff that BCs can’t inform or improve upon the professional judgment and expertise they use to make decisions. Utilities in North America, Australia and other countries have proven these views to be mistaken. The benefits of implementing a BC program are well documented (see below) and internal staff can be trained to prepare good BCs with a modest amount of training.
What does a good business case require, and when should you consider using BC methods? More sophisticated BCs generally have eight major elements:
Problem Description & Background: A thorough description of the problem to be addressed, including background and a history of the issue.
Service Levels: 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 description of the project, focused on the technical and performance requirements (objectives and desired outcomes) of the solution required, rather than specific details of possible solutions.
Options Considered (Including the Do-Nothing Option): A description of each option considered, including design and performance characteristics of each. Options considered should always include the “do-nothing” option, which serves as a baseline for comparing alternatives. Organizations that utilize business case 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 any alternative but 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 BCs capture direct financial costs (capital and operating costs), environmental costs, social costs, and risk costs. This is approach is widely referred to as “triple bottom line” analysis, or “TBL” for short. If the analysis doesn’t warrant a full TBL analysis, it should still consider direct financial and risk costs.
Non-Monetary Considerations: A description of non-monetary considerations that are relevant to the choice between alternatives. These could be the specific social policies adopted by the organization, difficult to quantify environmental impacts, or such things as aesthetic benefits of each alternative. Attached is business case prepared by Seattle Public Utilities (Rock Creek Fishway) that incorporates a full TBL analysis of alternatives, and well as a formal analysis of how non-monetary factors were weighed in choosing a recommended 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 insures that there is clarity and specificity about what option was selected; scope, schedule and budget; and, other expectations for how the project is executed.
The process described above is appropriate for larger projects, but can be scaled to be used on much smaller ones. Most organizations that have implemented BC methods set a dollar threshold (minimum dollar amount), above which full BCs are required. But projects below the threshold may only require an abbreviated BC, or are required only on a case by case basis.
Portland Water Bureau and Columbus Department of Public Utilities are examples of organizations that have implemented BC programs; the following papers describe the benefits they have achieved.
Both utilities cite the fact that the BC process has forced them to use fact based analysis of alternatives, including the quantification of risk costs, full life cycle costs of alternatives (including future O&M, repair, replacement and disposal costs), and non-monetary costs. Organizations that have implemented a BC process have also stated that the process has forced staff to think “out of the box” because they know that decision makers will question the choice of alternatives considered.
CH2M HILL offers business case training for many of our clients, either as a standalone service or as part of larger asset management engagement, and we are happy to provide assistance in preparing BCs where an organization requires help. Read this Public Works Magazine article for an example of how CH2M HILL supported Clean Water Services in Hillsboro, Oregon, with its BC.
Dan Pitzler has more than 25 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.