In the early 1990s, one of the world’s leading industrial companies was considering the construction of a new plant which was to cost well in excess of half a billion dollars. However, senior management and the board were uncomfortable with the project’s overall economics and decided to fundamentally rethink the investment. Two years later, the plant was opened at a capital cost of $350 million, 40 percent below the estimate first proposed. Capacity is the same as originally planned, but production unit cost is 30 percent lower than the company’s other operations and control over product quality—a key factor in customer satisfaction—is considerably better. Moreover, the plant is more compact and much simpler to operate and maintain.

To achieve all this, no revolutionary technology was needed, nor any change in product mix specifications. What did change was management’s attitude and approach to the project based on its recognition that more value could be extracted. Management’s insight and determination can dramatically improve the productivity of capital spent on major projects. The key is an approach called clean sheet capital redesign (CSCR). CSCR’s aim is simple: to extract maximum economic value from a project. Starting with a clean sheet, management must focus the project team on finding ways to do that. Often it will require a fundamental redesign of the project proposals, which in turn requires a fundamental shift in project-management processes.

A huge prize at stake

Chief executive officers in capital-intensive industries recognize that capital productivity can be the key to profitable growth. Yet large capital investments, particularly those in industries that are cyclical or have long planning horizons, rarely achieve their potential. With dismaying frequency, budgets and schedules blow out, unforeseen events depress prices, and return on investment slides. Even when projects come in on budget, hindsight often reveals lost opportunities that have cost millions in terms of profit forgone. Once the project is completed, it is difficult to make amends: even the best plant manager cannot extract enough value from labor productivity to compensate for a poorly located, poorly designed, or "gold-plated" plant.

Yet capital productivity has received relatively little attention. Apart from information technology advances such as computer-assisted design, many project teams still work in much the same way as they did in the 1960s and 1970s. This lack of focus on capital productivity is partly understandable: large projects come along intermittently; none is identical to any that has gone before; market, technical, and managerial discontinuities ensure that each new generation of equipment is different from the last; and, perhaps most important, competitive pressures are less keen before a project is built than they are after the money has been spent.

It is a huge wasted opportunity. Closer attention to the design of investment projects by companies in capital-intensive industries can yield great improvements in capital productivity—improvements comparable in magnitude to those made in manufacturing through the quality revolution, and in service industries through process reengineering. Case studies of five investment projects around the world—a chemical plant, two mines, a mobile telephone network, and a timber plant—identified capital savings in the order of 15 to 45 percent through use of the CSCR approach. Potential to boost revenues and reduce operating costs was also recognized. Overall, expected net present value (NPV) was improved by 35 to 80 percent of the projects’ initial proposed capital (Exhibit 1).

Yet CSCR’s scope for wealth creation extends beyond the individual project; it also opens up additional growth possibilities. Many companies feel reluctant to embark on new spending because, on the drawing board, few proposals look likely to meet the required rate of return; worse, even if they seem viable on paper, they might underperform. But companies that excel at capital productivity are confident about investing; therefore they embark on more projects, which generate more value. For these companies, new project development is the main engine of growth.

To maximize capital productivity, companies have to learn to improve economic value at every stage of project development. Most companies recognize three broad phases in a project’s life preceding construction. An initial business concept phase is followed by a period during which the project scope is tightly defined. Then detailed engineering is carried out. CSCR is a suite of mutually reinforcing management processes applied to each of these phases. They are known as business redesign, process redesign, and engineering redesign.

Business redesign: Develop a brilliant business case

Business redesign is about devising a superior strategy—one built upon a brilliant business case that will maximize returns from an investment. Too often, companies fail to ensure that creating value is the driving force in a project’s design. Rather than taking time to scrutinize underlying business assumptions, project teams rush to start building assets. Yet it is commercial decisions such as choice of market, technology, customers, product mix, and timing of market entry that will have the biggest impact upon NPV.

Insufficient management attention at this stage can mean some of the most critical strategic decisions are not examined enough; conversely, bringing a company’s best intellect to bear at this point yields distinctly superior strategies. Close contact between senior management and the project team keeps the emphasis on the main levers of value creation, ensuring that every opportunity for improvement is explored.

Business redesign typically yields a handful of ideas that account for about half of the capital savings and most of the revenue improvements that can be expected from CSCR (Exhibit 2). These savings cannot be recouped later in the project’s life, so although extra iterations between the board and the project team might be unwelcome, they are worth the trouble. Our five case study companies found ways to improve their strategies by considering how best to enter the market, tailoring their business systems to selected customers, and extracting value from flexibility.

Consider how best to enter the market. A project team almost invariably starts by thinking about assets. What are we going to build, and how big will it be? Yet an examination of the underlying business case will question whether the assets should be built.

Sometimes there is a better way of entering a market than by capital investment. The project team at the telecommunications company began to question whether it really needed to build an entire new mobile telephone network. Could it not share at least part of a competitor’s infrastructure? The apparent obstacles were the need to differentiate service, competitors’ unwillingness to cooperate, and regulatory objections. On investigation, however, none of these proved insurmountable. Service differentiation did not depend on building a separate network, and one competitor actually welcomed the prospect of earning extra revenue by renting out spare capacity on less used parts of its network. For its part, the regulator understood that competition did not depend on each contender owning its own, entire network, and was more concerned about limiting the proliferation of ugly steel structures across the landscape.

In most cases, of course, fixed assets will be necessary to create a new business. But there are still benefits to be had from challenging the timing, volume, and sequencing of market entry. Companies in the pulp and paper industry have long suffered from lemming-like capacity additions as prices rise in the business cycle, but one company which outperforms the pack on capital productivity bucked the trend by making counter-cyclical investments in capacity. The chemical plant’s project team recognized that rapid addition of a second and third production module would depress prices, so renewed effort was made to sell output forward at more favorable prices. And the telecommunications project team developing a broadband network discovered that the revenue potential for different nodes varied by a factor of two and construction costs by a factor of five, causing a rethink of the sequence in which the nodes were built.

Each change originated from a shift in outlook from "we build big projects," to "we create great businesses"

Each change to the business case was worth tens of millions of dollars to the project owners. All originated from a shift in outlook from "we build big projects," to "we create great businesses."

Tailor business system to selected customers. Project teams tend to think of a plant’s output as a commodity that cannot be differentiated. As a result, they devote too little attention to customer selection and to tailoring the business system.

The designers of a plant producing medium density fiberboard (MDF) for an Australian timber company at first believed they should focus on the local market because MDF exporters were receiving poor margins. They assumed they would be able to achieve only commodity export prices. Then they found a competitor—a Japanese timber and housing construction company—doing much better. This company had recognized that Japanese households needed compact furniture and fittings. The business system was configured accordingly, all the way back to forests in New Zealand. Forestry practices were designed to deliver the right density of wood, plant configuration was optimized to Japanese building sizes, logistics strategies aimed to minimize transport and handling costs, and final distribution avoided traditional Japanese intermediaries. Such atten-tion to detail led to a 20 per-cent reduction in delivered costs, and consistency of product quality justified a premium price (Exhibit 3). Application of these concepts significantly enhanced the Australian MDF plant’s economics.

Coal too is usually viewed as a pure commodity which presents little opportunity for products to be tailored to individual customers. Nevertheless, the project team developing a coal deposit in Indonesia recognized that its low-ash fuel would bring economic benefits to new power stations. Power stations can do without a lot of expensive handling and particulate-removal equipment if they are built to use low-ash coal only; operating costs also fall if there is less ash to handle and less waste to dispose of. Moreover, availability improves because slagging decreases. These benefits mean that a purpose-built power station is likely to pay $2 to $3 more per tonne for low-ash coal—an increase that would make a significant difference to the economics of the new coal project. Received wisdom in the company was that no power station would be willing to enter into a sole supplier relationship. Overcoming concerns about security of supply creates an opportunity to deliver superior economic value to the customer and streamline the coal producer’s operations.

Senior management input, with clever use of IT, can enable more value to be extracted from flexibility while spending less

Extract value from flexibility. Most investments have to contend with uncertain or fluctuating market conditions. Left to their own devices, project teams tend to respond by building flexibility into their design, for example in the form of slack capacity. This flexibility is likely to be expensive, and occasionally it misses the mark. Senior management input on what really matters, allied with clever use of information technology, will often enable more value to be extracted from flexibility while less is spent to get it.

The timber project team realized that profitability would improve if the traditional emphasis on throughput was shifted to maximizing the return from each processed log. They developed a simple optimization tool that combines information from three sources—log availability by grade, spot prices for final products, and customer order status. This allows instant decisions on optimal log and cutting pattern selection, and provides critical input to felling and pruning decisions in the forest and log and cutting pattern selection at the plant. Some minor capital savings have been made through careful selection of equipment and rethinking plant layout. More important, all key aspects of managing the business can be adapted to changing market conditions, allowing higher profits to be generated.

The designers of the mobile telephone network set out to find a way to lower capital costs by reducing the number of transceivers and towers built, while maintaining sufficient capacity. The solution was to take advantage of the geographical shift in telephone traffic during the course of the day. The conventional approach would have been to erect enough towers to meet peak demand in every area, but by equipping the stations with transceivers that can be remotely adjusted according to changing traffic patterns, demand was met with fewer towers.

Process redesign: Choose optimal assets and align them

During the second phase, process redesign, the challenge is to match the project scope tightly with the optimized business case. The preponderance of engineers in project teams usually means that decisions at this stage are determined by engineering rather than business considerations. But the process-redesign phase of CSCR almost always leads to a rethink of the proposed flowsheet. Properly conducted, with a small group of engineers whose expertise is balanced by people with commercial and other relevant backgrounds, a process redesign is likely to yield a few dozen significant ways to improve the flowsheet. Savings are in the order of 15 percent of the original capital estimate.

One design team building a pipeline from a plant to its shipping port had to work out how to cope with a doubling of volume through the pipeline three or four years into its life. The usual response would have been to build a pipe big enough to cope with future throughput, but which would have worked at only half capacity in the first few years. The solution was to use viscosity modifiers and higher-pressure pumps, avoiding "lazy" capital and improving the project’s NPV by $10 million.

Process redesign involves making a series of adjustments of this kind to individual components of the flowsheet. Then it seeks to optimize the entire system. It emphasizes the interfaces between important components, and looks for low-cost solutions to managing risk. It also aims to minimize the impact of production bottlenecks. It requires that competitiveness be proven, rather than assumed, before an activity is set up in-house.

Optimize across interfaces. A mining project team changed its decision to purchase 240-tonne haulage trucks—the largest in the world—to transport ore from the pit to the processing plant. Twenty-five years’ experience ruled that big trucks meant lower operating costs. But huge loads had led to the plant being designed for a batch rather than a continu-ous process, and the knock-on effects were severe. The most obvious interface problem was a $15 million intermediate stockpile. Operating and maintenance costs were also higher, plant utilization was lower, and there was a serious loss of quality control. Today, the mine operates with a larger number of smaller trucks, but its owners are better off to the tune of about $40 million in NPV.

A similar determination to reduce overall system costs prompted the timber plant team to hold stocks in partly processed form as master batches in the center of the plant, rather than as a finished product. As a result, stock was slashed by 60 percent, a $6 million warehouse was eliminated, and customer service was improved with shorter lead times.

Manage the risk/cost trade-off. As a project firms up and the team gets a clearer picture of the assets that will be built, the pressure builds to "sign off on the scope." Some uncertainties about market conditions or input materials are likely to persist, however, and project teams are tempted to deal with these by throwing money at them and designing a flowsheet that meets all eventualities.

The best approach is to manage both risk and cost, which means demanding to see all the options with their risk/cost profiles

By this point senior managers rarely have the opportunity to challenge the team’s decisions from a business perspective. Instead, they are presented with a flowsheet and accompanying costs, with no justification as to why one solution was chosen over another. A better approach is to manage both risk and cost, which means demanding to see all the options with their risk/cost profiles. While the project team’s preference is likely to be the option with the lowest risk but relatively high costs, managers should look for the low-cost option—then find ways to lower the risk.

One mining project team debated the merits of having two or three crushers in its plant. The established practice was to use three, but the type of ore to be processed and advances in crusher technology suggested two should suffice. On paper, the two-crusher option was more attractive for shareholders, yet doubts remained as to whether product quality would be acceptable to customers. The project team found a way to have its cake and eat it by designing the plant so that a third crusher could be fitted retrospectively if needed. The cost of buying the option was $500,000, while the original design, complete with three crushers, would have cost an extra $10 million. The mine is now operating, and two crushers do the job perfectly well.

Minimize the impact of bottlenecks. Capacity is a main driver of capital cost. This means capital spending can be reduced by avoiding bottlenecks and using capacity to the full. It is unrealistic, of course, to imagine that a plant will never suffer from bottlenecks: capacity expansions, technological developments, and unexpected production challenges are bound to throw the system out of balance at some stage during a plant’s life. Nevertheless, due attention to bottlenecks during process redesign will pay dividends in two important ways.

First, it will minimize the amount of capital that is "planned lazy." The technical experts at the chemicals plant were convinced that, after ten years on the drawing board, the main circuit had been optimized. Regardless, the project team used a dynamic model to simulate operations over several years, incorporating uncertainties such as unplanned maintenance. A wide range of capacity, sparing, surge and maintenance schedule combinations were investigated. Many size adjustments followed—mostly downwards—and a number of unnecessary surge items were eliminated. The base case design was improved by $30 million without additional operating risk

Second, it will improve project start-up, a notoriously difficult period for some new operations. A semiconductor plant can take several years to reach full capacity—plenty of time to affect the project’s economics. Past experience of problems at this stage often leads companies to allow for them in schedule and economic projections, so that a lengthy start-up period becomes a self-fulfilling prophecy.

The problem is that best practice is poorly documented, which means operators of each new plant have to reinvent the wheel. Yet with the benefit of hindsight, many start-up problems are avoidable. Poor circuit designs can be identified with system dynamics models of material flow; construction contract specifications can prevent the use of inferior components; and specialist start-up managers and a few additional employees can overcome initial skills and staff shortages. Even a modest improvement to the proposed learning curve was worth $60 million to the owners of a metallic concentrate project (Exhibit 4). Learning while a plant is up and running is unnecessarily expensive.

Outsource non-core activities. The conventional approach to big projects, especially in remote areas, is for the owner to build, own, and operate the whole box and dice. Though outsourcing certain activities has become common practice in some industries, the owners of heavy plant still underestimate its value.

Mining companies, for example, have long been accustomed to owning, driving, and maintaining haulage trucks as part of their business. There is evidence, however, that specialist contractors can be leaner, hungrier, and more cost-effective in this area. Since the ore is moved but not transformed during the process, the mining company loses none of its distinctive knowledge as long as it retains control of day-to-day mine planning. At one new mine, the NPV benefit of outsourcing haulage was about $10 million.

Examining outsourcing possibilities almost always results in a project that is more competitive in the long run—whether or not a specific function ends up in-house. More important, perhaps, outsourcing frees capital and management attention to focus on what the company is good at and can make money from.

Engineering redesign: Tighten the screws on unnecessary costs

Engineering redesign tightens the screws relentlessly on the unnecessary costs that creep in during detailed engineering work

The third phase, engineering redesign, is a highly structured commercial as well as technical review of a project’s every aspect. The aim is to tighten the screws relentlessly on unnecessary costs that all too often creep in during detailed engineering work when the team is under pressure to make sure the plant works and the project stays on schedule.

Hundreds of improvement ideas can emerge from engineering redesign. The size of the prize depends partly on the impact of business and process redesign. One project team working on a mine reduced its estimate of capital by 15 percent in this phase, although 5 to 10 percent is more likely. Operating costs can also be expected to fall and safety performance to improve as the plant becomes simpler, more reliable, and easier to operate and maintain. Detailed drawings should be avoided until this point because work in the business and process redesign phases could make them redundant. It is only now that the project team should be allowed to turn its attention to the nitty-gritty.

This is a time in the life of any project when thousands of decisions are made. What size pump? How many pressure-release valves? How thick a layer of insulation? At what angle the conveyor belt? What standard of electrical wiring? It is tempting in this complex environment to focus on making sure the thing works. Clearly, this is an important and legitimate objective, as are safety, ease of maintenance, and operating flexibility. But the ultimate goal remains to create value.

Engineering redesign challenges the project team to submit every component to a rigorous fit-for-purpose test. It also seeks to establish fresh benchmarks so that designs keep abreast of best practice.

Design fit-for-purpose components. It is easy to be glib about the concept of fit-for-purpose; most people assume their designs already match this description. But their confidence is often misplaced, either because of a tendency to allow a bit extra, just to be sure, into the design, or because the design is based on ill-founded assumptions or unquestioning acceptance of historical practice. Why, for example, build a railway that can withstand a once-in-a-century flood when the plant’s life is only 15 years and a rapid response capability can be counted on? Why waste time incorporating extra functions in a control pendant that operators have no intention of using? Why build walkways on both sides of a conveyor belt if a single walkway is safe and functional?

A way to ensure components are designed to fit their purpose—no more and no less—is to scrutinize the drivers of cost. The internal roads at one plant provide an example (Exhibit 5). A simple breakdown of the roads’ costs (driven by length, width, and surface material) prompted the project team to shorten the road by cutting corners, narrow it in low-traffic sections, and use cheaper surfacing materials where possible. Money-saving ideas worth almost $1 million were generated—about 30 percent of the total budget.

Benchmark the way things are done. The march of time can play tricks on the most experienced and capable project designers. Large projects are relatively rare events, so it is not uncommon for people to remember a decision but forget the detailed assumptions which underpinned it. The initial design thrown together in a pre-feasibility study is more likely to reflect earlier assets than earlier thought processes. Since technical and managerial disciplines advance all the time, relying on what you did last time rather than why you did it is fraught with danger.

That is why benchmarking is so valuable during engineering redesign. Disciplined and detailed application of this tool enables design teams to take advantage of developments outside their own company or even their own industry. One breakthrough in the two-crusher versus three-crusher debate was the recognition of advances in crusher technology. In one processing plant, the project team discovered it could run a conveyor belt at a 20 degree angle of elevation rather than the 12 degrees that were initially deemed necessary. The belt was shortened and the plant’s ground area decreased. In another example, a storage shed to cope with the hazard of 60 days’ worth of explosives stock was going to cost close to $5 million. But a benchmark shed was found that managed with just ten days of stock and cost $300,000.

CSCR is not a quick fix for a project struggling to get board approval. It is an approach that enables management to begin a revolution in the way organizations think about capital spending. The revolution requires project teams to embrace radically different norms of performance, which in turn requires intense attention and consistent support from senior management. It also requires managers to operate tight systems for exploiting ideas for improvement. Bringing a big capital project to life involves a great many people, and accepting the CSCR challenge is, in effect, to embrace a sweeping change program. It is not for the faint-hearted, therefore. But our case studies suggest that for many companies in capital-intensive industries, CSCR could be the single most important lever for unlocking growth potential—a prize that has to be worth the effort.