Introducing Quanta AI

Technology firms suffer constant margin pressure on products already on the market (in the sustaining life-cycle phase). Value engineering reduces product cost most commonly through component replacements, material changes and part eliminations. The value extracted does not impact core function; in fact, it often improves it. Value engineering projects have the most impact on a firm’s gross margins when bundled into a portfolio. Over time, portfolio returns are amplified as multi-year investments come to fruition. This is a key margin management lever.

Mark Streich and I met at the Thunderbird School of Global Management ten years ago. We recently reconnected at npv10 to champion Quanta AI in the technology sector. After finishing the MBA program, I spent five years as a value engineering fund manager for a Fortune 500 Silicon Valley company, and my work intrigued Mark, a serial entrepreneur and trained computer scientist in the Silicon Valley. He spent the past few years developing portfolio optimization AI for the oil and gas industry. In a single-click, executives can model hundreds of wells with differing production, investment and revenue streams to support decision making with data. He also tested his platform in real estate with top-notch results. A manually managed portfolio can be optimized by over 20 percent using this tool and approach to help guide strategy with data.

This proprietary platform is the bedrock for Quanta AI. We are targeting value engineering as it dovetails with our Silicon Valley experience. Additionally, Quanta AI can also support resource allocation for new product introduction, as well as research and development. If there’s a portfolio with multiple complexities and a myriad of variables, Quanta AI can optimize it. Astoundingly, large firms still rely on program managers using Excel to crunch large data sets. This approach is cumbersome, time consuming and futile as a method to capture the most valuable combination of projects.

Quanta AI incorporates all potential variables and provides optimum outcomes based on goals the investor wishes to model. Risk, predictive analytics and forecast variability are all incorporated into a single repository. The algorithms generate forward-looking data and metrics to determine if future investments are aligned with goals and resources. Savvy investors can decide—with a click—which investments to buy, sell or hold relative to a choice of financial targets (e.g. NPV, IRR, cash flow, debt to equity, payback period, etc).

In my value engineering portfolio management experience, we needed Quanta AI. Managing hundreds of investments with various return profiles manually is outdated, unnecessary and inefficient. As Mark says, “That’s what computers are for.” And that’s what Quanta AI is for.

Introduction to Portfolio Analysis for Oil & Gas

We have recently developed an introductory course for the Oil & Gas industry in partnership with PetroLessons.

Course Link

If you influence or make portfolio decisions for your company this course is for you!

Introduction to Portfolio Analysis illustrates the use of “portfolio analysis” to develop and compare alternative strategies that an O&G company might pursue. The examples included throughout the course show how projects and corporate performance measures interact and how the interactions create new opportunities for the corporation. The interactions can be quantified to allow decision-makers to compare alternate strategies and quickly assess the business performance trade-offs they will likely face when they select one strategy over another.

The course covers:

  • What is a portfolio?
  • Why use portfolios?
  • Typical corporate planning approaches
  • Portfolio planning
  • Ranking approaches
  • Rank-and-Cut Example using Excel
  • Multi-Factor Scoring Example using Excel
  • Integrated Optimization Example using npv10
  • Evaluating Portfolios
  • Creating forecasts
  • Using Generic Projects for Developing Strategy
  • Uncertainty in Oil & Gas
  • The Two-Digit Rule™
  • Reducing Uncertainty
  • Change Management 101
  • Change the Conversation
  • Goals and Constraints
  • Forecasts
  • Uncertainty

Who should take this course:

  • Financial Planning & Analysis (FP&A) Executives and Analysts looking for better approaches to corporate planning.
  • C-Suite executives needing to take a higher-level view of their company in order to make better strategic decisions and plan ahead for different scenarios.

Benefits/ Course Objectives:

Understand how using a portfolio approach to select projects and analyze different strategies can improve the organization’s performance, and how the culture may need to change to enable a better dialog between the financial planning team and the operating units. You will also see how using multiple forecasts, with probabilities, can enhance your insight into different strategies.


All Forecasts Are Wrong

“I don’t want any yes-men around me. I want everybody to tell me the truth even if it costs them their job.”
— Samuel Goldwyn

Goldwyn’s movie industry, with blockbusters and flops, has to deal with the uncertainty of knowing whether moviegoers will show up in sufficient numbers to pay all the costs of production, marketing, and distribution, and still return a profit.  Is it “true” that the latest release be an “Avatar” (one of highest grossing movies) or a “Cutthroat Island” (biggest flop)?

There is uncertainty in any forecast, as with the hurricane path forecast above, and yet many companies continually ignore that uncertainty when planning a company’s future.  You can attempt to reduce the uncertainty by gathering more information, but at some point the cost in time and money to do so will exceed the value of reduced uncertainty.

If missing a forecast is punished, employees will adjust their forecasts accordingly, attempting to avoid punishment.  This usually leads to inflated budgets, lengthened schedules, and lower sales targets.  And knowing this “sandbagging” occurs, executives reduce the budgets further, shorten the schedules more, and increase the sales targets.  And the cycle continues…

As an executive, you should want to know what is the possible range of results, so that your company can plan accordingly.  You should still set challenging goals, but you can get an idea of how likely those goals are to be achieved if your teams provided a range of forecasts.

Our npv10 product makes it simple to provide multiple forecasts for each product line, business unit, project, location, or however else you subdivide your business.  Using these, we run hundreds of simulations to generate a range of results across your entire business, and calculate the range of results for all of your key performance indicators.

The above chart shows the “80% Confidence” range for Cash Flow from about 40 different projects a company had in various stages of development.  Some of the established products had little uncertainty in their forecasts, and new projects further out had more.  The greatest total uncertainty was about 2 years (8 quarters) out as some older products tailed off, and newer products were starting to take off.  The 80% represents the number of simulated results that fell in the range, with 10% of results falling above the shaded range, and 10% below.  The dark blue line is the weighted average of the forecasts (not simulated).

How does knowing this uncertainty help you manage your business?  You may set internal goals in the upper range, but provide external forecasts somewhere in the lower range.  You can also plan for the extremes, knowing ahead of time what you will do to react to these alternative outcomes.  

And scenario planning is not just for the downside.  If you have wildly successful projects, you may need to react quickly to increase personnel to support those, or may need additional working capital to handle cash flow timing issues.  Knowing ahead of time what you will do enables you to best prepare, and not be forced to react in real-time, leading to less optimal results.

If you want help managing your organization’s uncertainty, contact us, and we will show you how to embrace uncertainty.