IO Structural Benefits : The NPV neutraliser



In your efforts to construct a solid business case for an Integrated Operations (IO) deployment, it is important to break out the benefits you would like achieve down into digestible chunks. These should be both realistic, yet also bold enough to inspire people to throw their weight behind the project and execute it with a type of intensity that gives your program that true transformational feel. A big positive of the structural benefits associated with many IO deployment is that the numbers are fairly straightforward to calculate. For a business with the right conditions, these benefits can recover large parts of your cost associated with an IO deployment, if not all of them.

This means that under the right conditions your project can be NPV neutral based purely on structural benefits, and that all the optimisation benefits you would hope to achieve can be sold as pure upside.

To IOC or not to IOC

It is important to point out that the team at Global IO do not necessarily believe that an IO deployment necessarily need to include the construction of an Integrated Operation Centre (IOC). By improving the operating context and situational awareness of your teams whilst at the same time developing a culture that is biased towards whole of value chain decision-making. We believe that many of the optimisation benefits of IO can also be achieved by extensive use of virtualisation.

In cases where an IO program does not include an IOC, the structural benefits will be less pronounced, and more focus should be placed on the optimisation benefits delivered at a much lower cost. Where the decision is made to construct an IOC, it is important to accentuate that any control room that forms part of an IO program is just that, ‘a part’ and structural benefits aside, the intrinsic value of an IOC is very hard to show in isolation. It is how the whole business interacts with the IOC and how the IOC supports the operations that add the most upside value.

Relocation Benefits

For organisations that operate large, distributed value chains with people and operating assets located in a myriad of sites, offices, control rooms and operating centres, there is often significant operating cost savings to be gained from centralising all roles that is not absolutely needed in the field. When these locations are in the remote areas, as is often the case in mining and Oil & Gas, these benefits are even more pronounced. From our experience, relocation benefits are mainly found in the following areas:

Personnel Costs – Persuading people to live in remote areas often involve offering a range of benefits that is not commonly available to employees living in or near more populated centres. This includes higher salaries, remote area allowances, housing, company vehicles etc. Where the workforce is of a FIFO nature, these costs include camp costs, flights etc.

Personnel are generally provided with an additional 1 – 2 weeks of annual leave per year to allow for travel.  Unused annual leave remains on the balance sheet as a liability until taken and also more people are required to cover the higher annual leave allowances provided.

Personnel acquisition costs are also much higher in remote areas. Access to skilled labour in or near major centres can be a significant benefit, especially where the deployment of an IO program will change the skill set required to optimise the value chain in near real time.

Maintenance Costs – Maintenance costs of vehicles, buildings and associated infrastructure can be significant, especially where the workforce is distributed in such a way that it is hard to share service personnel across operating centres. Centralising operations in a fit for purpose facility whilst closing down remote offices/control rooms can amount to significant savings.

Support Costs – Similar to maintenance costs, the cost of providing effective production support to remote personnel and operating technology carry with it a penalty in terms of access to infrastructure and personnel. With a well-structured approach to centralisation, many of the support functions can also be centralised, with associated cost savings as economies of scale gets realised.

Safety benefits

Removing people from harsh and inherently high risk operating environments, i.e. remote mine sites, to a lower risk office environment can positively lower an organisations risk profile in what is now almost a universal quest towards zero harm. Safer work places are also more attractive environments for employees, and this contributes to the personnel acquisition and retention benefits discussed earlier.

Future Expansion Costs

Where organisations have expansion plans for their distributed value chain, an IOC that has developed into a true centre of operational excellence can significantly contribute to lower expansion and commissioning costs, whilst at the same time also de-risk expansion projects in meaningful ways. Capital costs associated with expanding operating facilities like offices, control rooms etc. can be done at a lower cost base by simply expanding the IOC facility already in place, as opposed to establishing the required infrastructure on site.

The commissioning of key pieces of infrastructure i.e. new processing facilities can also be done in a more efficient manner. With highly skilled controllers, planners and a contingency of expert technical/engineering support at hand to run tests and do troubleshooting in a tightly knit, integrated fashion, commissioning time and cost can be drastically reduced.

Innovation Efficiency

Consistent innovation is the result of a disciplined application of a well-designed process that generally consists of 4 major phases; idea generation, idea screening, business case development/piloting and lastly a commercialisation/implementation phase. IOC’s by their very nature have the ability to significantly improve the performance of the first two steps.

With a core contingency of staff continuously focused on finding better ways to optimise the value chain in real time, the volume and quality of improvement ideas can be kept at consistently high levels with relatively little effort if the right continuous improvement culture is fostered. The idea screening phase using multi-disciplinary teams can be done in a much more efficient manner, seeing that so many of the key players are likely to be centralised at the IOC.

If these two processes are supported by sufficient resources and a clear mandate for innovation, the cycle and cost of future innovation can be dramatically improved.

Conclusion

The structural benefits associated with IOC deployments can be enormous. Organisations are often unaware of the extent to which the cost of maintaining personnel in distributed working environments are hidden, and we have seen numerous times how pure relocation benefits ended up paying for some very expensive centres!

However, for these centres to be effective and adding value, it does not have to be expensive! Organisations that are willing to invest in the leadership required to create a high performing operating culture, these benefits could be had at a very decent price. Maintaining personnel in a decentralised value chain can be up to 2 times more expensive that moving them to a lower cost, centralised operating environment, and with these sorts of numbers, engineering a NPV breakeven point based on structural benefits is not that hard to do at all.

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