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Portfolio Primer

How to maximize shareholder value across the enterprise.

Fortnightly Magazine - September 2008

business relative to its current revenues. This is a key measure of investment efficiency.

Expectations: The confidence shareholders and analysts have in the company’s ability to perform well in the future.

Managers at an asset level take actions to maximize SHV by improving internal value mechanisms. But a utility company can take actions to improve one of the SHV drivers—asset efficiency—and can target a set of areas for improvement ( see Figure 2 ).

There are many levers that a company can use to improve overall SHV through targeted projects. This is achieved by allocating investment resources among potential SHV improvement projects. At a power generation plant, for example, management may choose to upgrade old equipment and reduce unplanned outages in order to increase production, as well as reduce maintenance costs. In another instance, the best return on investment might come from improved receivables through better invoicing, bill-to-pay processes and systems.

SVM provides a framework for identifying levers that utilities can use to recognize and prioritize projects that increase SHV.

APM Benefits

Investment decisions made by management at a plant or business unit level are aimed at maximizing SHV for the business unit—and therein lies the conflict between maximizing SHV at the local level versus the corporate level.

The investment resources available to business units typically are allocated at the corporate level in conjunction with the business unit’s operating plans and budgets. Most companies may believe they have optimized assets at the corporate level. In reality, this might not happen because while investment allocations are made at the corporate level, investment decisions may be made at the business unit/plant level. The corporate office might set financial-performance goals for business units to ensure proper return on investment, but this doesn’t guarantee corporate SHV will be maximized.

For example, in a power generation company with a mix of nuclear and fossil plants, using common systems and platforms for O&M across all plants might be the best way to maximize corporate SHV. But at the same time, managers of individual plant and business units might prefer to invest in alternate systems and projects aimed at revenue growth.

The APM approach, using the SVM, provides a standard framework to identify all projects’ impacts on balance sheet, income statement and share price. It treats the corporate SHV as a function of relevant value drivers across all the business units. Corporate SHV then is maximized by analyzing the impact of the value drivers within internal and external constraints, such as maximum investment, external demand and regulatory requirements.

In today’s competitive environment, the best-performing companies make informed decisions based on a dynamic, comprehensive view of their entire asset portfolio. Incorporating an APM approach can help a utility company gain visibility into the value drivers of SHV, visually link the projects and activities undertaken by the enterprise on SHV, and allocate resources based on SHV return. It will help resolve the disconnect between performance optimization at the asset level and SHV maximization at the portfolio level.