Whether you’re an automation engineer or an IT manager, getting funds from the “suits” for a project that you just know will be a great solution to an agonizing problem never is easy. The supplier sales team may have outlined the many benefits, including financial, that their new technology or software will provide. You can see it. But how can you explain those benefits to management at your company or plant?
The first, and most important, thing is to step back from the “us vs. them” mentality and regard financial and management people as part of the solution.
Keith Campbell, executive director, OMAC Packaging Working Group (www.omac.org) advises, “Learn to talk in the language of business. Keep in mind that project justification translates the language of engineering into the language of finance.”
Define business need
Campbell suggests using the same methodical approach to justifying the automation project that a typical engineer would use to design the project. First, know the business side, not just the technology. Then understand and apply the fundamentals of financial justification.
Start the justification process with the business need in mind. Study your plant’s annual goals and list the business benefits of the proposed automation project. All of the areas that are congruent will become the focus of the justification proposal. Then benchmark other leading companies. Find out what they are doing and how they are doing it.
Think of your funding request as a business proposal, not a technical one. Two rules that Campbell preaches are, “remember that finance sets the rules,” and “justification is technology independent.”
Now, identify the base case, or starting point for the analysis. What would be the financial case if nothing were done? Then, identify alternatives and document what would be done, how it would be done, how long each would take and all of the costs and benefits associated with each alternative. Next determine cash flows associated with the base and all alternatives. Use the company’s financial rules, such as payback period, net present value, rate of return and hurdle rate, to make your case.
Some of the ways that automation can generate positive cash flows include improving machine speed, increasing efficiency, reducing material loss, increasing mean time between failures, reducing downtime, reducing changeover or reconfiguration time, and reducing delivery and commissioning time.
Finance 101
It is necessary, of course, to learn the language of business before you can use it. Here are some definitions to get you started.
Payback period is the number of years required to return the original investment.
Cash flow analysis will be the crucial part of the justification proposal. Since the project will likely cover several years, it is important to establish a common value for the dollar so that accurate comparisons of values distributed over years with varying inflation rates and interest rates can be determined.
The present value of all future cash flows must be discounted at the cost of capital minus the cost of the investment. Discounted means that a future cash flow is worth less than a present cash flow. The formula looks like this:
Internal Rate of Return (IRR) is the interest rate that equates the present value of the future cash flows to the investment outlay. The IRR assumes that cash flows can be reinvested at a rate equal to the IRR.
The Hurdle Rate is the minimum rate of return to justify an investment considering the cost of capital, risk premium (track record of requestor, type of investment), and other factors.
