Why Do You Need a Value Framework?By Stan Coleman
Anything can be done given enough time and money. But in the world we live in, the reality is that we never have enough time or money. Compromises need to be made.
How do you figure out if the right decisions are being made, especially when you need to compare hard costs versus soft benefits? For example, how do you decide if an incremental improvement in reliability justifies the required expense? It gets even more difficult when you need to compare a portfolio of investments such as:
- investments designed to increase system reliability…
- with investments that increase wind or solar capacity…
- with investments that mitigate environmental or safety risks…
- with infrastructure investments designed to improve employee efficiency?
In order to objectively compare these investments, you need a value framework. At Copperleaf, we utilize a value framework to help clients quantify all the benefits of an investment—and the probability and timing of achieving such benefits. Quantifying the benefits, and gaining agreement on the value of those benefits, allows all the various impacts of investments to be fairly and objectively considered.
What does a value framework for a utility look like?
The appropriate value framework will vary from organization to organization because it depends on the strategic objectives of the organization. However, the value framework for a utility will typically include measures for:
- Cost of the investment
- Financial benefits of the investment
- Service level impacts
- Safety, environmental and regulatory risk mitigation
What to consider when building a value framework?
When constructing a value framework it’s important to consider “who” receives the benefits. If we are constructing a value framework to evaluate investments for a regulated utility, then the question is: “what is the benefit and cost to the end customer?” For example, if we are looking at service level impacts for an electrical distribution utility, then the cost of outages to end customers is used to determine the value of reliability improvements. Similarly, every cost, risk mitigation and benefit is converted to an economic scale based on the cost and value to the end customer.
Many utilities use a “scoring” system, whereby investments are compared by scoring attributes of the investments. For example, an investment might receive a score on a scale from 1 to 10 as to how much it improves reliability. Such a scoring system is a step in a right direction as it attempts to make the decision more objective, but the final result is not easily understood.
What does a score of 67 mean?
Good question. I remember discussing this a few years back with the CFO of a utility and he told me: “Yes we have a scoring system, and last year I was told that given our budget, we would have to cut all projects that scored less than 67. Well, what is a 67? What is the impact to my business if I don’t do projects that scored less than 67?”
A value framework answers that question. By using a value framework you have an overall economic evaluation that can be used to defend your investment decisions. You can also see the implication of the decisions. You can understand what financial benefits you are foregoing by not investing. You can understand what risks you will face if you do not invest.
Developing a value framework will help you make better decisions and it will make it easier to defend those decisions. Copperleaf has created a white paper describing how to create a value framework. Please visit our resources page for more information.