By Marco C. Janssen, UTInnovation, the Netherlands
Business cases often fall into two traps. To overcome it, programs should start with a realistic assessment of the accuracy that is possible with reasonable effort.
I think that our modern-day societyis characterized by four words – volatile, uncertain, complex, and ambiguous or VUCA as it was coined by the US Military. It is in this environment that we are striving to develop and implement increasingly complex transformational programs which creates a number of challenges especially for one very important step, the creation of the business case.
Same as before, the business case is expected to justify the costs and the benefits linked to the business performance targets. Although there is nothing new in the practice of business cases, under VUCA conditions, I think the traditional approach to business cases often does not work that well. Current investment portfolios consist of programs that feature emerging technologies with many unknowns and limited historical information all of which make business case development as much an art as a science.
While the financial measures of internal rate of return, net present value, and payback time will be the metrics through which investment decisions are made, the uncertainty raises questions on underlying assumptions, specifically on what must be true for the projected results to be believed.
Until now most business cases are designed to value projects that are incremental developments with largely predictable outcomes. But what if government policy mandates a utility to move from fossil fuels to cleaner resources within a period of twenty years? The utility may respond by increasing the number of renewables-based distributed energy resources near the points of consumption. However, the outcome of such a strategy is uncertain because the DERs can be owned by different parties such as third-party aggregators and customers, meaning achieving the objectives depends on forging partnerships; facilitating procurement, installation, and interconnection processes; and creating efficient commercial options.
At the same time the investments, include a variety of technologies such as DER management systems, load-balancing mechanisms, grid upgrades with self-healing protection and control systems, advanced voltage control, customer portals, various customer communication channels, maintenance and support services, and billing and fulfillment services. Many of which are constantly evolving, sometimes changing rapidly in ways that are not always predictable. So, there are many ways business cases can go wildly off target.
Number projections can serve as a reasonable basis to determine benefits and costs. But an approach to projecting future costs, anchored on accounting data, runs into limitations with projects under VUCA conditions. Similarly, monetary benefits derived from savings, productivity improvements, and increased revenue from current baseline values can be misleading if limited by the lack of forward-looking insights.
The complexities of these conditions can be unsettling. As a consequence, business cases often fall into two traps “do nothing” or “drown in detail”. Both approaches can lame modernization programs. To overcome this trap, I think programs should start with a realistic assessment of the accuracy that is possible with reasonable effort. The business case can frame the uncertainty in model accuracy as “model risk.” Programs can then use thresholds on the model risk to make decisions. Where the risks are out-of-bounds, instead of drilling down into smaller parts, programs need to find other ways to deal with risk assumptions and uncertainty as modeling risks cannot be swept away by drilling into noisy data that is not tightly correlated to the outcome. Business cases must be constructed as transparently and as clearly as possible so that risks are made clear and transparent for the decision-makers. Beyond that, leaders need to make decisions based on their own collective wisdom and good judgment.
Marco C. Janssen is the CEO of UTInnovation LLC and the former Director of the Smart Grid PMO at the Dubai Electricity and Water Authority. He received his BSc degree in Electrical Engineering from the Polytechnic in Arnhem, Netherlands and has worked for over 27 years in the field of Smart Grid, Protection, Control, Monitoring, Advanced Metering Infrastructures, Distribution and Substation Automation. He was a member of IEC TC57 WG 10, 17, 18, 19, the IEEE PES PSRC and CIGRE B5 and D2 WGs. He was the convenor of D2.35 and editor of the Quality Assurance Program for the Testing Subcommittee of the UCA International Users Group. He holds one patent, has authored more than 58 papers, is co-author of four Cigre Technical Brochures and two books on Smart Grids and Electrical Power Substations Engineering and is the author of the “I Think” column in the PAC World magazine.