Start to Finish Capital Program Value Realization

Point of View

Start to finish capital program value realization Increasing returns on capital programs

The global capital projects market reached nearly $1 trillion in 2015 and is projected to grow again in 2016. But spending trends vary significantly by industry. Some sectors will experience continued growth as demographic trends are in their favor. Others, including upstream oil and gas, are experiencing significant contraction in the wake of oil prices that are one-third of their peak. Take control of change

The energy sector accounts for 30% of S&P 500 capex spending. 800 S&P capex by sector $700 700 $671 $649 $637 12% 12% 600 $580 12% Utilities 12% 6% $567 6% 12% 7% Telecom Services $517 10% $495 11% 7% 10% 500 $486 9% Info Tech 11% 8% 5% 10% 8% $446 9% 5% 13% 9% 4% 4% 4% Financials $417 8% 9% 7% 5% 4% 400 14% 3% 6% 6% $370 9% 8% 8% 6% 9% 5% 7% Health Care 4% 4% 7% 10% 9% 8% 12% 9% 6% 7% 13% Consumer Staples 8% 6% 8% 11% 10% 7% 4% 4% 6% 10% 300 7% 4% Capex ($bn) 8% 7% 9% 9% 10% Consumer Disc 11% 4% 9% 6% 5% 8% 9% 9% 10% 6% 9% Industrials 9% 17% 14% 10% 9% 4% 10% 10% 4% 5% 5% 200 10% 4% 18% 4% 8% 11% Materials 11% 10% 10% 10% 20% 11% 9% 3% 11% 10% 4% Energy Downstream 12% 4% 4% 12% 100 12% 8% 8% 9% 4% 22% 21% Energy Upstream 4% 6% 20% 21% 23% 20% 5% 15% 15% 19% 19% 11% 12% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LTM Source: Compustat and Goldman Sachs Global Investment Research

In either circumstance, capital spending Due to these issues, the Project is a complex decision. Too often, programs must be managed efficiently Management Institute estimates that management establishes capital allocation and optimally to maximize the return on $135 million (13.5%) is at risk for every in the previous year as a baseline for investment (ROI) for capital funds. Large, $1 billion of capital program spend. The future allocation. In this case, a series expanding programs and more modest, magnitude of benefits related to improved of projects left over from previous years contracting programs alike are subject to capital program management have been can be executed without sufficient three key factors that reduce the yield of a confirmed based on Hitachi Consulting’s regard for more optimal returns available capital program: experience of implementing changes in alternate business units. Safety and across the capital value chain. environmental effects, risk profile nn Capital allocation—misallocation of considerations, scenario definitions and capital funds to lower ROI programs At any stage – allocation, execution/ project interactions must be addressed to program efficiency and program nn Program efficiency—overspending and better optimize the use of available funds. effectiveness/benefit realization – inefficient project execution The capital project allocation process the yield of a capital program can nn Program effectiveness—suboptimal itself can be changed to address the ROI be compromised. Based on Hitachi returns versus expectations potential of the total program. Consulting’s experience assisting energy Conflicting guidance from stakeholders, companies in capital programs, Hitachi Program efficiency ambiguous designs and inconsistent, recognizes the potential to achieve up Once funds are allocated and approved, uncoordinated program management to 3-10% reduction in costs and up to capital projects must be optimally approaches have a bearing on these three 15% ROI improvements when addressing managed for both cost and time-to- factors. In addition, program outcomes multiple stages of the capital process. execution in order to minimize budget are impacted by the inability of an overruns. Considerable attention has been organization to adopt new technologies Capital allocation dedicated to project management, but or establish “readiness” of their workforce The distribution of available capital too often an individual project requires to operate under modified processes and across a range of strategic, tactical extraordinary attention to achieve subpar management systems. and essential infrastructure initiatives outcomes. Impact capital eciency

Capital Allocation/ Project Portfolio Management Project Execution/ Total Program Program Eciency Losses

Optimal Program Allocation for Eectiveness Risk Proﬁle

Capital Program Optimal Program Returns Yield

Value Over-runs and ROI below losses from high operating expectation due ineective costs from to engineering portfolio inecient design, program management program modiﬁcations, management turnover to operations

Corporations would benefit from to mitigate cost overruns and schedule benefit from managing the design process consistent management systems and slippage. more effectively, holding the engineering roles, accountabilities and processes groups accountable to evaluate risks applied across projects, like internalizing Program effectiveness consistently with appropriate checks and and codifying the effort so as not to When programs underperform and don’t balances. rebuild the process and management meet expectations, it is often attributed Returns are also improved through approach for every major project. to incomplete or suboptimal engineering creation or adaptation of management Additionally, a contractor’s activities must designs or the slow realization of approaches related to the new be effectively measured and controlled expected benefits. Energy companies can operational elements. Key performance

Results will depend on a company's ability to move toward more strategic spending. Strategic

∞ Based on market/ Strategic/ competitive analysis ∞ Most ﬂexible timing Capacity Initiatives

Cost Reduction/ Yield Improvement ∞ Proﬁtability-based ∞ Production loss avoidance Infrastructure/ Reliability

Business Required: ∞ Baseload spend by Regulatory/Environmental/License to facility/BU Business do Business Essential indicators, monitoring strategies and About Hitachi Consulting accountabilities within a continuous, Hitachi Consulting is the global solutions feedback-oriented management routine and professional services organization are essential. In this way, ROI is not just within Hitachi Ltd., a global innovation realized but it is realized expeditiously, leader in industrial and information increasing present values and shortening technology solutions and an early payout time which helps self fund future pioneer of the Internet of Things. Hitachi phases of the capital program. Consulting is a business integrator for Benefits the IoT era and a catalyst for digital transformation. Using our deep domain In the energy industry, Hitachi helps knowledge, we collaborate with clients clients achieve better return on to help them innovate faster, maximize investment of capital. Hitachi’s global operational efficiency and realize capital management expertise and measurable, sustainable business and seasoned energy industry professionals societal value. As a consulting-led have implemented best practice standards solutions company, we can help you and procedures to: leverage data as a strategic asset to drive nn Improve decision making in the capital competitive differentiation, customer allocation process loyalty and growth. To learn more, visit nn Lower risk and increase expected value www.hitachiconsulting.com. of capital project portfolios nn Establish processes to reduce costs across multiple projects nn Reduce re-work and associated costs/ cycle time impact in project execution nn Enable on-time, on-budget project execution nn Develop consistent sustainable management approach to capital programs nn Enable larger and faster realization of program benefits