Operational Planning: Getting it right...first time

By Dr Nigel Bradly of PIPC

The Hedge Fund Journal, May 2006

With more hedge funds dabbling in the unlisted market than ever before, Dr Nigel Bradly, US practice lead for project management services at consultancy PIPC, looks at some of the skills associated with project management in the achievement of investment targets.

When former Lehman Brothers banker Jacob Worenklein sealed a $1bn deal for three New York power plants in February, it set the clock ticking on a bullish business plan. It was the culmination of two years of investment planning. Yet just six months earlier, Worenklein's business, US Power Generating Company, was a team of five running on bedroom-level IT and consisting of little more than a vision and paper trails between his partners and investors.

To go from a standing start to a fully operational $1bn business in just six months is no small feat, but then US Power Generating is being run and backed by no ordinary group of people. The company is an ambitious venture with backing from private equity house Madison Dearborn and Hunt Power from Dallas. Worenklein also lists in his team former American National Power and Orion Energy executives, management consultants and Lehman bankers.

While the financial credentials and sector experience are undeniable, the business's plan to buy underperforming power plants, integrate them into a brand new business while preparing to purchase its next group of distressed assets demanded considerable operational experience. In short, it needed a comprehensive plan to build a business that would increase the value of the assets and provide a rapid return on investment.

US Power Generating enlisted the services of global consultancy PIPC to address the needs of turning an investment fund into a potent operational animal, capable of not just running the three intended targets from Reliant Energy, but further, as yet, unidentified acquisitions. Turning investment ideas into reality is a project management skill, in this case demanding a scalable framework to which new acquisitions could easily be bolted on, limiting transition time and thereby maximising the potential to increase value and ROI.

A crucial role of a transition manager is to provide a single point of control for the transition and integration of the power assets. It is essential to create a robust framework for program delivery, to distil and simplify the integration process and provide clarity of objectives, which are simply stated and communicated.

Ensuring communications are accurate, cross-program dependencies are managed, and there is a sound governance structure demands specialist operational knowledge. Failure on any of these points and US Power Generating's vision couldn't be realised as quickly or accurately as it wished.

Mobilising the transition

The key to establishing foundations quickly is in understanding the context of the deal and the potential ramifications of change. A deep understanding of the business drivers, the terms and conditions of the sale & purchase agreement, and developing an understanding of the legal prerequisites for financial close of the deal is essential groundwork. It ensures that any plan is business driven, with its sights firmly set on rapid turnaround and maximum profit.

Breaking the prospective operation down into four functional areas - commercial; legal/external affairs; operations and maintenance; and finance and administration means that a transition manager can start organising and prioritising immediately.

PIPC and US Power Generating worked closely in building an initial plan to ensure that it fitted with the on-going vision of the business. If there was any uncertainty, any small detail left to chance at the start, it would inevitably come back to haunt and hurt the project further down the line, so the initial consultations were crucial.

When trying to kick-off a business like this it is important not to pretend to know all the fine detail from day one. A more realistic timeframe is to have a good understanding within 4-6 weeks and then a high level understanding of the medium range targets and then mobilize as quickly as possible.

Laying foundations

For the US Power Generating project, PIPC designed a 100-day transition plan from when the deal was first announced through to the handover of the business. The biggest tip I could give anyone facing the same daunting task is to first work out the outline plan of attack and not to start filling-in as this could waste valuable time in the early stages. This sounds easier than it can seem, as if you don't have the right people on board, you won't necessarily know everything you have to do from the off, and so getting it right is predicated on having the right staff and advice.

Identifying what is legally required for the deal to close (finance, insurance, title confirmations etc) and the 'must-haves' and the 'nice to haves' from the business side enables prioritisation within the timeframe. This makes it more likely that the project will keep to the 100-day transition - this is important as it is not in the best interests of the business and its investors to let any operational implementations drag on. The danger is loss of momentum, of morale and of the chance to maximise value and ROI.

Identifying who is to do what task is also fundamental. PIPC developed a high level plan that identified a requirement for certain experts, such as IT engineers, HR / payroll, operations & maintenance transition expertise and so on. This formed the basis of the team that could start laying crucial foundations.

The team needed to be mobilised quickly and in particular we had to pin down any governance issues - define roles, set-up reporting lines and so on. With US Power Generating, governance was a big issue and initial ambiguity over roles and responsibilities hampered the team's ability to get things done at times. This was perhaps a result of the fact that US Power Generating was a very small team in the initial phases of the deal and the management structure had to multitask. There may, however, be duplication between consultant roles and permanent staff that will need to be managed in the future.

This is the point at which a project manager should be able to hand over the operation, at least after allowing for some initial bedding down of the project. It's up and running but it's not always plain sailing.

Potential pitfalls

Given the extremely short development time and the size of the business to be set up, the project was strewn with considerable obstacles and challenges. But any project, whatever the magnitude, will throw up problems and it takes experience and a lot of pre-planning to ensure that these problems do not turn into project bottlenecks.

The amount of time taken to transition is a common focus of concern because it can impact on the potential to maximise the return on the investment. But getting it right is paramount because if anything is overlooked at this stage, there is an inevitable knock-on effect when it comes to owning and running the plants effectively. While with US Power Generating this was not a final concern, there were other sticking points.

For example, we did a lot of recruitment for the new organisation after the deal had been closed, which is less than ideal. In a perfect scenario, we'd develop the organisational structure, employ the right people and those people would then form the transition / integration team.

In a 'real' world this won't happen because of the enormous costs involved, so you have to make do and develop things as you go. This means people will be working out of their comfort zones at times. It also means that the business will need to use external experts to supplement in-house capability. Failure to invest in external help is a big risk.

Perhaps the toughest challenge facing any complex start-up, and this was certainly the case with the US Power Generating project, is communications. The fact that there are so many different parties - internal communications, communications between the purchaser and the new plants, with external agencies, with the seller and with investors - each requiring specific information by a particular time is begging for something to go wrong. It is crucial to the success of the acquisition to get communications as effective as possible and this can only be done by careful planning and step by step implementation.

Preparing to go live

It is ironic that the post deal transition was largely an anti-climax, the payoff for months of careful planning and meticulous implementation of the agreed strategy. PIPC had developed a transition plan a month or so ahead of the close to make sure it had a good handle on what needed to be done on deal-day.

It provided another level of granularity from the overall program plan. This was supplemented by a detailed checklist of what had to occur over the period right before and right after close. Some workstreams also ran practice runs - such as pre-running an inventory of the fuel oil that had to be executed at 12.01am on the day of purchase, to make sure the approach was accurate and everyone understood their roles.

When the deal was closed it was then a case of fine tuning. PIPC continued to track the transition for several weeks to make sure it was all running smoothly. With everything running like clockwork, we relinquished control, safe in the knowledge that US Power Generating was a fully operational business and well on the way to realising its investment vision.