IBM Tririga and Managing Capital Projects

By Richard Taggs, President TEAM Global According to Alfred D. Chandler in his Pulitzer Prize winning book on management and organizations, The Visible Hand, modern large-scale firms arose to take advantage of the national markets and productive techniques available after the railroads had been built. He determined that they prospered because they had higher productivity, lower costs, and higher profits. The firms created the "managerial class" because they needed to coordinate the increasingly complex and interdependent system, and to achieve efficiency through coordination and managerial organization and the ability to manage very large capital projects, such as the network of railroads or the building of the Panama Canal. The Visible Hand did not put Adam Smith back with the shipping news, but it put managerial skills at the forefront of industrial successes and set new visions for understanding how large organizations are organized and managed, and the many benefits they provide an advanced industrial economy. Readers might be saying that we know about the writings of Alfred Dupont Chandler, but what has this to do this an article on IBM Tririga and management of real estate. The writer, of course would reply that IBM Tririga is more than managing real estate for it is also about effective organization, capital budgeting, and managing capital projects. More to the point, when reviewing the many features of IBM Tririga for managing large projects one is led to ask if the developers of IBM Tririga were busy reading Chandlers books, including Strategy and Structure and Scale and Scope while busily designing and building the capital projects aspects of Tririga, for the breadth and depth of the many features are of a monumental scale, a tribute to the organizing principles consistently present in Chandlers findings and writings. An application as full featured as IBM Tririga helps us to better understand our own organizational structure, to know who we are and where we want to go, and to help us journey into those existential mysteries that business so often confronts us with. Each new capital project can take management on voyages of discovery, so IBM Tririga will be a wise and trusted advisor to travel with. To begin the journey, lets look at an overall diagram showing how IBM Tririga allows full project planning, from the initial setup, to funding, to tracking and to closing.

IBM Tririga, as seen in the next diagram, allows funding to be allocated and tracked across programs and projects. This is very important for it allows the company to see what its capital budgeting is. Furthermore, this structure for portfolio management establishes strong connection between strategic planning and the choosing of capital projects, thus selecting projects that are aligned with organizational strategy and core business. IBM Tririga has established portfolio management as an effective way of sharing resources (financial, employees, contractors, equipment) more efficiently than on a project-by-project basis. Plus, this is the standard way that large organizations manage their funds, by portfolio across all projects.

A small list of features are Cost Codes for projects, services, and locations, Funding Requests, many, many templates such as Project Template with Budget Setup (Original Budget, Budget Forecast, Budget Transfer, Budget Change), linking of funding sources to programs and projects.

For a specific project, you can set up and track Schedule Variance, Funding Summary, Projects over Schedule, Contract On-time Completion Rate, Percent Projects over Budget, current budget to forecast, change order to budget, percent RFI overdue. In addition to what appears to be an endless list of financial features, there is also a collaborative aspect to Capital Projects that links all the departments and players, thus providing details about persons who are involved in the project such as investment and financial, the treasurer and the controller, the engineers, operations staff, and others.

Furthermore, there are links to MS project or Primavera, workflows, document management, KPIs, a balanced scorecard, metric measurements for hundreds of project decisions and reports and reports and reports. IBM Tririga allows management to largely determine if the project is economically worthwhile and, if it is, how to fund it, such as from the companys own funds (entity basis) or from borrowed funds (equity basis). It is the separation of these two questions, possibly success and how to fund, that provides a more transparent process. If an organization is planning to borrow funds, it is important that a thorough project assessment be done, such as an engineering aspects study, for financial management has a different outlook than does financial accounting, for they are not concerned primarily with profit but instead with returns of cash over the short and the long term. See below for a simple model of Free Cash Flow, which shows a negative cash investment of $70.5 million by year 4, a profit starting in year 5 and a total profit of $208.8 million over a seven year period. This simple Free Cash Flow model affects the decision criteria, such as payback period, and represents the foundations of engineering economics and capital budgeting. Simple example of Free Cash Flow for a capital project. Year 0 1 2 3 4 5 6 7

FCF -5.0 -40.5 -55.5 -22.5 50.0 75.0 95.0 108.8 CFCF -5.0 -45.5 -101.0 -123.5 -70.5 5.0 100.0 208.8 FCF = Free Cash Flow CFCF = Cumulative Free Cash Flow

We know that financial statements provide the transparency needed in the business to record and report on assets, cash position and profit. Balance sheet represents the value of the company through its assets and liabilities. Income statement shows the productive effort of the company by representing the companys revenue, cost and profit. Cash flow statement represents the net flow of cash into and out of the business that is the cash position of the company. IBM Tririga allows us to see how Financial statements are different from Project Cash Flows, also called Project Financials, in a way that we see and appreciate that the aim of Project Financials is to determine the free cash flows and not the profit. Financial statements' form and content follow a regulatory requirement set by accounting profession and various bodies of the government. Project Financials guidelines for the layout and format for the project cash flows are that they must be easy to construct, to read, and to interrogate. Both Financial statements and Projects Financials help in determining the projects impact on the companys performance and in assessing the business risk that this project may bring.

With regards to managing of project finances, the cost management process in IBM TRIRIGA application deals with cost codes and budgets. It effectively manages the project finances through monitoring, analyzing, and evaluating, forecasting cost information. The cost management process of IBM TRIRIGA provides a platform to closely monitor costs and also it analyzes budget estimates, cash flows and project funding. Lets now turn from the general to the particular, and use example of oil/gas project challenges, one upstream and one downstream. An oil company is considering the purchase of an oil lease. The expected present value of cash flows, based on leasing, finding and producing oil, is $200 million. The estimated present costs value of leasing, exploring and producing is $120 million. Using Tririga, the company can determine the value of the underlying asset, the least cost, set a time to expire, and calculate the estimated return and its risk. An even bigger project is a $10 billion oil field project somewhere in Russia, which will need a pipeline to a port, and a port refinery. Investments are estimated to be $1.2 billion the first three years, with an estimated production of 200,000 barrels per day, with a production cost estimated at $12 per barrel. The project is funded by a number of oil producers using a bond issue, with bonds being amortized over 20 years. Can engineering economics, prevalent in oil/gas since the 1950s, be used to determine capital allocations? Yes. Will funding for this project be owner managed, a cost-reimbursable contract or lump sum turnkey? Can this project be planned, estimated, funded, approved or not approved, and if approved managed within Tririga. Yes, by identifying the funding requirements, assessing a yes/no decision on the project by assessing project risks and potential paybacks, by automating project management during actual project execution, by providing built-in metrics to determine the project is meeting planned deliverables. The long list of IBM Tririga functionality for capital project management may provide the remedy for the problems faced by many oil executives and their dissatisfaction with overall project performance, especially the costly budget and schedule overruns, which were listed by Booz Allen Hamilton in a recent oil/gas capital projects performance survey. Oil executives are not the only ones suffering from an unprecedented increase in spending and lagging performance of capital projects. In conclusion, no company can solve their organizational and project challenges without the use of superior software. IBM Tririga provides any large company with the ability to organize itself,

and once organized to make informed, transparent decisions, or what we call the act of decision making, from opportunity assessment, to business case, to business plan to final business plan, and an approval of the final implementation plan. Additionally, IBM Tririga helps deliver three important drivers for enhancing a companys success: superior use of finance; superior strategy; and superior organization. If he were still writing today, Alfred D. Chandler would recommend that organizations try Tririga, for he admired large operations that are well managed, and he would surely affirm that, to manage and guide projects to success, todays managers should glove their visible hands in IBM Tririga software. TEAM Global Tririga analysts contributed to this article: Monica Osana, Dianna Gayeta, Melodie Mondevilla Translated into Japanese by TEAM Globals Michael Derr