Kenneth Brill's recent commentary in Forbes, The Real Cause of BP's Oil Spill, frames an interesting economic trade-off of "mostly working" solutions versus "never failing" solutions. The gist of his argument as I understand it is: a) often the cost of "never failing" solution are not economically justifiable; and b) although BP came to this conclusion with its Deepwater Horizon oil rig, they in fact made a horribly wrong decision because they overlooked the true potential costs.
Had BP the benefit of building a value model, it may have avoided its ugly fate. Here is what the value model would have looked like.
It's based on the cost impacts of dealing with the aftermath of the explosion as reported in the news media and includes the efforts to stop the leak, clean-up, liability and fines. We've also included other costs relevant to BP’s business model such as the lost market capitalization and lost oil revenue.
Within the value chart, the large green bars demonstrate that "never failing" solutions provide a tremendous amount of value by avoiding billions of dollars of cost. The small blue sliver at the bottom shows the estimated cost of BP's Current Spill System, i.e., the "mostly working" blow-out preventer (estimated at $500,000 from what was gleaned from the news). Some experts claim that an additional investment of $500,000 for a remote control shut-off valve would have prevented the initial explosion, but BP declined because of its cost justification criteria.
I cannot judge whether the remote control device can be considered "never failing" or even what the full cost of a "never failing" solution really is. Regardless, this value model clearly indicates nearly $32 billion worth of value to be had in considering such a solution. Makers of remote control shut-off valves and other oil rig safety equipment should definitely take note of this.
Value models are therefore useful to frame these types of strategic decisions. Of course, one can challenge the specific cost calculations. Yet directionally, the value model supports an obvious conclusion that none can deny - BP's decision making has cost them dearly. Too bad for them (and many others) that they didn’t see it before.
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Note: this is the first of a series of value models to illustrate current business topics using the LeveragePoint for Value Management solution. For more information, visit us at: www.leveragepoint.com