AgustaWestland designs, develops and manufactures helicopters. The process for bringing a new product from initial idea to market is long and complex, and therefore involves many uncertainties. The company uses @RISK to develop financial business cases and feasibility studies to produce in-depth analysis so that the senior management team can make informed decisions about which products to develop.
AgustaWestland is an Anglo-Italian helicopter company owned by Italy’s Finmeccanica. It provides rotorcraft systems design, development, production and integration capabilities, along with in-depth training and customer support, to military and commercial operators around the world, offering the widest range of advanced rotorcraft available.
The Risk Assessment, Feasibility Analysis and Business Cases department is responsible for supporting the decision-making process for key company initiatives and opportunities from the initial stages of verifying their feasibility. This requires the development of structured financial business cases to justify investment against economic returns, and to monitor results.
The department develops AgustaWestland’s risk assessment methodology, procedures and tools for the new products in line with international best practices. It then ensures that these are applied and used consistently to determine all possible outcomes when the company is evaluating opportunities.
Determining Financial Feasibility of Investment
New helicopters require large investments in order to design, develop, test, certify and bring the product to market – a process that can last three to five years. The Risk Assessment, Feasibility Analysis and Business Cases team uses @RISK (part of the DecisionTools Suite risk and decision analysis toolkit), to undertake risk analysis to determine the financial feasibility of developing any new product, preparing a financial business case for approval by the company and its shareholders.
Previously the department worked only with what it calls a ‘deterministic’ Excel model. The model’s inputs include: non-recurring costs such as engineering studies for the design and development of the new product; prototype manufacture; flight tests; and certification. Other inputs considered include: the number of helicopters planned for manufacture per annum over a 20-year period; recurring helicopter unit costs per system / subsystem; unit prices for different helicopter configurations; the elasticity curve (to show how a change in price affects demand); and the spare parts business model (the purchaser of a new helicopter will also need to buy replacement parts during its lifecycle, estimated at around 20 years, and this is built in to profitability and cash flow). Financial parameters such as inflation, the weighted average cost of capital, bank interest rates, and exchange rates in different currencies are also accounted for.
The deterministic model provides financial outputs such as revenue, Earnings Before Interest and Taxes (EBIT), net profit, Net Present Value (NPV), Internal Rate of Return (IRR), financial break-even, etc., and shows how these vary depending on specific input values.
@RISK Clarifies Accuracy of Forecasts
The deterministic model can help to predict a single set of results for the main model outputs. However the economic situation cannot be predicted with any great accuracy, especially when the business cases are based on a period of 20 years. In these situations, after evaluating the achievable results with the deterministic model, it is crucial to also take uncertainty into account. This makes it possible to evaluate in advance how changes to the inputs will impact key financial outputs and, with this insight, implement mitigation actions.
@RISK allows the team at AgustaWestland to apply different probability curves, including triangular, pert and normal, to the inputs of the model. The Monte Carlo analysis enabled by @RISK provides a better view of the model itself – i.e. enables them to determine the accuracy of the forecasts and the way to improve the business both in true feasibility and in financial results.
Using the tornado graphs generated by @RISK, AgustaWestland can see which inputs have the greatest effect on the financial outputs, and therefore require more attention. For example, specific discussions with the engineering department to determine mitigating actions could potentially keep recurring costs under control if the tornado graphs show that these have the greatest impact on the financial outputs presented in the business case.
@RISK Drives Company Decisions
“Working with such long timeframes is a key challenge because it is not possible to know for certain many of the parameters (inputs) that we use to determine the financial business case of a new product,” explains Vittorio Maestro, Head of Risk Assessment, Feasibility Analysis and Business Cases at AgustaWestland.
“Our use of the risk analysis element of Palisade’s DecisionTools Suite has enhanced our ability to assess, control and drive company decisions. We can now focus on the key activities that enable us to pursue the best product within the most appropriate financial timeframe,” adds his colleague Francesca Schiezzari, who uses @RISK to build similar financial business cases for a variety of company projects, including a Helicopter Training Centre and a Logistics Support Centre.
Key software features useful to AgustaWestland:
- Tornado graphs
Examples of output graphs:
Examples of input graphs: