Cost of capital and ROI for digital deployment in chemical
In recent years we have engaged several businesses in the chemical sector to discuss opportunities for digital transformation. One key question which comes up is the ROI, and funding models. How much will it cost, and how much will we make? What is the return on investment, and where can digital projects offer the biggest outcome?
If successful, the adoption of industrial digitalisation solutions could, within 10 years, boost UK manufacturing by £455bn, drive sector growth by 3% and create 175,000 new jobs. Digitalisation is the technology focus behind Industry 4.0. However, if the Chemicals sector is to benefit from its widespread take up, a number of challenges must be overcome.
‘Digital’ opens up opportunities for enhancements in a number of key areas such as increased competitiveness, better operational efficiency and flexibility, enhanced productivity performance and plant availability.
Through analytic use of intelligent plant data to inform current and future strategic decision-making, industry 4.0 can be a real game changer. New digital technologies can drive many areas of day-to-day chemical plant operation, including tackling the high energy levels prevalent in the sector, allowing energy consumption in the face of ever-rising utility costs to be measured, monitored and, ultimately, controlled for bottom line benefit. Likewise, efforts to connect, optimise and integrate plant wide control and automation systems at all levels from raw material intake to process stages, as well as provide process visualisation and scheduling can be positively influenced by the adoption of digital tools. They will enhance performance efficiencies, provide data-driven business insight and enable operational assets to be maintained safely and securely.
Indeed, issues of operational safety and cyber security threats remain top priorities for the sector and digitalisation offers many proven solutions. Whilst the various challenges of undertaking a digital ‘culture change’ within organisations, sourcing experienced technology partners and up skilling employees within what is a traditionally conservative sector must be recognised, a primary concern for many looking to embark on a digital journey is that of finance!
Should they invest? How best to invest? What are the options available? For those chemical companies already preparing for a digital future, it is clear that many have strong ROI expectations when it comes to investment payback. According to recent research, 48% of chemical companies expect to see digitalisation-linked ROI of two years or less, while just 10% forecast a ROI timeframe of over 5 years. This emphasises the need not only to partner with a trusted and long term technology vendor, but also to ensure that chemical companies seek out the right kind of smart financing solution that matches their particular need and secures the best option to underpin significant and far-reaching digital aspirations going forward. By doing so, it also removes the immediate need for large capital outlay and increases the availability of CAPEX funds for other much-needed expenditures.
Some current and innovative financing options to suit a wide range of situations, include: Performance-based (outcome) financing – investment in new or upgraded technology and equipment can be made on the basis that it will deliver defined and measurable business benefits such as improved profit and productivity, energy savings or efficiency improvements. This emerging solution allows a company to align its payments according to a defined set of business ‘outcomes’, rather than paying to use technology regardless of what it achieves for the organisation. ‘Performance contracts’ enable payments to be predicted on the basis of expected levels of business benefit. Financing total cost of ownership (TCO) – this is already a well-known solution in the manufacturing sector. It is designed to embrace the full costs of using technology, not just its acquisition. It satisfies demands for financial agreements to encompass service, software, maintenance and consumables, as well as the simple technology acquisition.
For digitalisation strategies, it provides a financially reliable package ensuring that running costs will not escalate unpredictably over the lifespan of the technology. Financing aligned to operational use – on occasions a manufacturer needs to acquire innovative technology that either takes time to install, delivers accelerating revenue or cost-saving benefits over time, or only produces commercial advantages on a seasonal basis.
Financing arrangements can be made where the flow of payments is matched to the expected patterns of use. Financing energy efficiency – as an energy intensive sector, eliminating waste is a key concern for chemical companies. There is a broad range of technology solutions that can cut energy consumption and, with it, cost. But often access to affordable finance to invest in energy-efficiency initiatives is problematic, especially for SMEs. Today schemes can match the financing period and the level of monthly payments to the projected energy savings. This makes the investment effectively zero cost for the business.
The ROI cycle is crucial to any business investment decision, and with the use of smart funding options there is real opportunity to minimise the cost of capital whilst maximising business outcomes.
For more information:
See how Siemens has partnered with Knauf Insulation and made savings based out contracted outcomes
Visit our financing website