Don’t Fumble Your Tech Funding Opportunity

Need money from the bosses for IT and other technology investments? Don’t drop the ball. Getting the ear, and pocketbook, of senior management requires a game plan based on a firm appreciation of the stats—both costs and ROI.

By Peter G. Martin, D. Eng., PhD, VP for Strategic Ventures, Invensys Process Systems

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Despite their growing potential for driving business value, advanced automation and information technologies are yet to be fully embraced and supported by senior management within the pharmaceutical industry. There seems to be a general perception that these investments seldom realize full value. Why are senior managers so skeptical?

Most senior and executive managers in pharma feel they have already made huge capital investments in high technology, and just can’t see the business benefits these investments have delivered.

They point out that, during the approval process for most capital investments, applicants predict very strong ROI, but once the project is up and running the promised returns can’t be documented.

This is a huge problem. Either the investments are realizing benefits that are not discernable, or they are not realizing benefits at all. Usually, it is a combination of the two.

Econ 101

To analyze the issue, it is helpful to review the basics of capital project economics. Figure 1 presents a classic capital economic profile. The bar chart represents the costs associated with the capital investment over its useful life. The dashed line represents the business benefit realized from the investment. Return on investment is simply the integral of the benefit minus the integral of the cost.

I was recently involved in an analysis of a number of completed industrial plant automation projects. In almost every case, plant personnel could determine the cost of the technology over its lifecycle, but had almost no idea of the actual benefit it provided. The cost accounting systems that should have provided this information couldn’t or didn’t, because in industrial operations these systems have typically been designed to support the financial reporting requirements of the organization and not its operational management. Because of this, most cost accounting systems used today report monthly, plant-wide cost and margin information.

Since so many activities occur in any industrial plant over a month’s time, it is impossible to determine which component of any financial improvement or loss should be attributed to any specific activity, even to automation system improvements. Today’s cost accounting systems lack both the timeliness and process-detailed information to effectively measure the benefit from technology. From a business manager’s perspective then, most technology investment requires a leap of faith: It’s a cost with no evidence of discernable benefit.

The key word in the previous sentence is “discernable.” A few decades ago, the business value of most technology investments was clear and measurable—usually just a matter of evaluating headcount reduction brought on by new automation systems. Over the last decade, however, it has become apparent that plants can’t cover the cost of technology simply by reducing heads.

There just aren’t enough heads left. The value of technology investments must now be determined by variables other than personnel reduction cost. Unfortunately, with the current cost accounting systems, this is almost impossible to do.

New Tech, Same Function

An additional problem for pharmaceutical manufacturers is the “replacement technology” mindset, which wants to acquire new technology only to replace the exact functionality of the aging technology. If, for example, an installed control system begins failing on a regular basis and replacement parts become increasingly expensive and hard to find, the owner issues a request for proposal specifying a replacement system that does exactly what the aging system did. Even though the newer system would likely offer considerably improved and expanded functionality, this typically would not show up in the initial requirement for the new system, so the new functionality is never tapped and little, if any, business benefit results.

In the pharmaceutical industry, regulations and validation issues exacerbate the replacement mindset. Tight regulations combined with the cost of validating functional changes in the installed technology systems significantly suppress the inclination for continuous improvement. The FDA’s emerging process automation technology (PAT) guidelines are aimed at alleviating this constraint, but it is still very much a concern in pharmaceutical manufacturing operations today.

Replacing old technology with new technology that does the exact same thing seldom delivers business benefit. From that perspective, it might be a good thing that accounting systems can’t measure business benefit. No one would ever be able to justify any technology investment, and that would be of great detriment to all business operations.

It is not that plant managers don’t know that the new system offers more capability than the one being replaced. They just figure they will take advantage of it once the system is installed. But that seldom happens. One reason is that the technology expertise of the project team leaves once the project is commissioned and the remaining talent does not always have the capability to utilize the new functionality. Another reason is that engineering staffs in pharmaceutical plants have been downsized to the point that they are just trying to keep the plants operating and seldom have time to consider the untapped potential of their technology. The net result is that often less than 40 percent of the available functionality and capacity of installed automation and information systems is actually used during the systems’ life. This represents huge lost opportunity and contributes to senior management’s reluctance to invest in technologies that offer great benefits, but whose potential is seldom realized.

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