Stress Test Business Decision Support

by Tony Carrino, HSB Solomon Associates LLC

In our uncertain, volatile business environment, it is necessary to step back, look at our decision processes and ask, “Do we have robust processes to best manage our energy business?” Using terminology popularized by current events, this downturn in the economic cycle might be considered a stress test for your company’s business decisionmaking process

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If your company’s business decision processes are strong, they are dependable through expanding and contracting economic cycles. Flexible and comprehensive processes capture all aspects of the business so that even if some elements have little or no impact today, they will be reflected in future plans. That is, as market or regulatory rules change, the process has not misstated or forgotten components of the economic picture that might become bigger parts later.

Consider the following three examples of how business processes may be strong or weak: one where decisions are more subjective or quantitative; one where the economic equation or business model is changing; and one where risk to the business might not be understood or communicated fully.

The first example supports the idea that decision-making in an economic downturn should not be completely subjective. In the short term, as business contracts or stabilizes at lower activity levels, a need exists for applications that dynamically support short-term financial controls and identify key areas for budgetary control.

  • The first element of the process is understanding whether control opportunities can be implemented in cost centers where budgets have room for cutbacks. It depends on past cost-control efforts—that is, whether costs are already at bare-bones levels or if there are additional reduction opportunities. It depends on the level from which you begin to make cuts and also determines how soon bleeding (in performance) might ensue.
  • The second element is knowing, for the medium term, how those cost controls are coupled to operating performance in a quantifiable manner, and what interim practices should be implemented to monitor performance during the reducedspending period. (Solomon’s research on capital-intensive energy assets indicates it takes two to three years for overhaul spending reductions to be felt as deteriorating asset performance.)
  • The third element is having a recovery plan or exit strategy when the business climate returns to normal.

Another example might be in changing environmental regulatory constraints. The new administration’s environmental regulatory changes will affect energy business economics in different, significant ways. Business-support processes that consider those constraints from a perspective that can be shown as controllable to operational organizations become essential communication tools and a tactical part of compliance strategy. Distinctions should be made between hard technology constraints, capital investment opportunities and improvements that can be made regarding operational excellence in your assets. These operational excellence improvements can be the least costly options available in a changing regulatory climate.

The last example is when operational risk may not be well-communicated. Poor understanding, communication and control of risk are underlying causes of the economic crisis. Communicating risk exposure, trends and control opportunities in your organization necessitates translating business risk issues into technical and economic terms so everyone understands. Another concept is realizing that some risk elements have lag times while some have immediate impacts. Different business plan risk profiles require having information available to monitor risk, even if failures or interruptions are not occurring currently.

In all three examples, having solid data and translating it into useful information in your decision processes is important during downturns and prosperity. If you don’t have robust, internal decision-making processes and one of these examples applies to your organization, ask your business partners to work with you to ensure that your processes will help you manage your business through this constantly changing business climate.

Author

Tony Carrino is managing director of North America at HSB Solomon Associates LLC, a performanceimprovement company and management consultants to the energy sector for nearly 30 years. He supports power generation clients around the world and has more than 25 years of industry experience. E-mail him at tony.carrino@solomononline.com.

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