Portfolio Primer


How to maximize shareholder value across the enterprise.

How to maximize shareholder value across the enterprise.

Fortnightly Magazine - September 2008

How can utility companies ensure investment dollars are being allocated wisely?

Utilities aim to maximize the performance of their assets in order to maximize overall shareholder value when attempting to solve various business problems. Examples include how to improve the returns from business units that are still new and have yet to prove their viability; where to invest to sustain the fiscal-year performance of a star business unit; or how to decentralize decision making and empower field engineers.

Corporations often fail to realize that optimizing individual asset performance doesn’t always create optimal enterprise value—even though local asset level performance might be aligned with the overall corporate strategy. More often than not, financial performance data is collected and analyzed at an asset level, while the ultimate corporate goal is to optimize business performance at a portfolio level.

The disconnect between local asset optimization and shareholder value (SHV) comes from operating in a multiple-asset, multi-dimensional, complex business environment, while trying to make investment decisions using “two-dimensional” data. A utility ultimately consolidates the financial results of its portfolio of assets into a single set of financial statements. Often, many of the financial measurements are not segmented by individual assets, only collected and reported at a corporate level. These financial measurements, directly or indirectly through further consolidation, are used to measure and report the value the enterprise creates for its shareholders—its ultimate corporate goal.

Asset portfolio management (APM) attempts to capture and analyze the relationships among the drivers of SHV at the portfolio level. It provides management with a well-informed, multi-dimensional picture to help make efficient asset investment decisions that optimize the total enterprise SHV.

Asset Portfolio Management

Under the APM approach, the elements of SHV are analyzed to create a visual map linking the creation of SHV to strategy, projects and day-to-day operations. APM uses a framework that identifies and captures the relationships among value drivers at the portfolio level. APM, thus, provides a comprehensive multi-dimensional view of corporate performance, from the perspective of a single value-creating entity, thereby supporting portfolio-investment decisions with a unified powerful direction.

At the core of APM is the shareholder value map (SVM), which analyzes SHV in terms of its components and drivers. SHV is determined by four basic components: revenue growth, operating margin, asset efficiency, and expectations (see Figure 1) . The brief working definitions of these key components are:

Revenue Growth : Improvement in the company’s top line, including payments received from customers in exchange for products and services. This is a key measure of operational effectiveness.

Operating Margin : The portion of revenue left over after taxes with the cost of providing goods and services subtracted. This is a key measure of operational efficiency.

Asset Efficiency : The value of assets used to run a