Utilities and regulators are stuck in a rut, treating rate-base assets in a traditional way and depreciating their value according to a straight-line calculation. But alternative accounting...
Reducing Lifecycle Expenditures
Total cost of ownership accounting optimizes long-term costs.
resources used on multiple projects instead of the traditional one-project-at-a-time approach provides the information required for a detailed resourcing discussion among engineering, operations, maintenance, finance, and supply-chain staffs. Additionally, applying the TCO model may uncover other innovative strategies including opportunities to fund worker cross training that increases competition, or creating an apprenticeship program with local technical and vocational colleges to increase labor supply. Depending on regional labor market economics, TCO reveals the long-term advantages such programs can have on decreasing labor costs while simultaneously increasing resource skill levels to improve capital project execution.
Undoubtedly, there are challenges associated with TCO implementation. With respect to the management of change, staffs must be trained (and rewarded for) overcoming the practice of only evaluating acquisition costs. These organizational changes likely will result in increased training expenses and require ardent support from senior executive leadership. Furthermore, long-term benefits realized by using this method are difficult to capture in an annual budget cycle, necessitating alternate governance protocols to monitor and report multi-year cost savings. For example, a project manager may face the decision between waiting an extra two months for the best-fit condensate pump-motor replacement to arrive or progress with a readily available, lower-cost alternative, knowing the long-term reliability of this component option is lower. Without a governance structure that rewards long-term benefits capture, the project manager may be penalized for selecting the best-fit replacement. There also will be challenges associated, including soft benefits or difficult-to-quantify costs within the analysis. Last, information systems must be in place to capture the data required to quantify indirect costs.
Utilities implementing a structured TCO approach for capital project decision making will be in a position to distinguish themselves from among their peers as effective stewards of allocated capital. The programmatic development and adoption of the TCO approach not only reduces long-term project costs, but also improves communications across departments and provides greater transparency into project cost drivers. These key benefits are achieved through an unwavering commitment to the required culture change and realizing the need for a highly skilled and trained supply-chain staff that communicates with design and work management personnel.
1. Jason Lehman “Moody’s: Gas, electric IOUs facing near-term borrowing challenges,” SNL Financial LC, Charlottesville, Jan. 16, 2009.
2. “Gartner Total Cost of Ownership,” http://amt.gartner.com/TCO/MoreAboutTCO.htm.
3. Frank A.G. den Butter, Kees A. Linse “Rethinking Procurement in the Era of Globalization,” MIT Sloan Management Review , Fall 2008.
4. Based upon prior project experience.