How to convince your CFO to invest in energy management software
Dirk Den Haese – Global Director for Energy Management Solutions, Honeywell Home and Building Technologies
In today’s business climate, it’s a real battle to get energy saving projects funded by senior executives. Budgets are tight and resources for projects are limited. So if you want the attention of decision makers, you’d better have a good story with solid economics coupled to a solid strategy. In this article, we bundle know-how gathered from dozens of energy managers who have used Honeywell’s Enacto™ energy intelligence solution to show how an energy savings plan could benefit their business and convince their CFO to make the investment.
In most cases, energy management software will be considered just like any other project. The CFO will always ask for the following information before making a decision:
- How much will it cost to set up the system and keep it operational?
- What savings will our company get from it?
- What value does energy management software bring to the company?
The first question can be answered relatively easily, based on the Enacto offer. Since Enacto is mostly offered as a turnkey solution, it will have a set-up component for hardware and software and a software-as-a-service and managed-services component.
The savings from an energy management software solution
The hardest part is to quantify savings. Reduced energy consumption will be a key part of savings, but additional savings are driven by efficiencies, for example fewer people or resources required to control energy, and smarter purchasing decisions – lower energy prices — due to better forecasting.
To quantify potential energy savings for Enacto, you need to measure your energy management maturity level. Levels range from 1 (innocence) to 5 (best practice). The lower the maturity level of energy management in the organization, the higher potential savings can be.
Honeywell has developed a two-hour workshop during which your maturity level will be defined and the financial value of investing in Enacto will be quantified. Although every company is different, our workshop calculations reveal that the potential average savings for customers using Enacto range from 0.5% to 9%.
The Net Present Value
Although they are related to each other, ‘value’ differs from ‘savings’. A CFO will translate ‘value’ and the positive cash this project will generate for the company over a certain number of years. Once you quantified this array of yearly cash flows, you should discount to today’s reference. For example: if inflation is 2%, $100 this year will be worth only $98 dollar next year. So roughly spoken, $100 in savings in 2017 is worth about $98 today due to inflation.
The discount factor is equal to the weighted average cost of capital (WACC): a number your financial team will know very well. This number tells you how much money an investment will cost the company per year and it is a mixture of cost for equity and loans.
The number of years (called ‘horizon’) you need to take the cash flow into account, relates to how long you expect to benefit from the savings generated by the project. Typically, horizon relates to the technical lifetime of the purchased solution.
Once you know the discounted cash flow after taxes for the number of years equal to the technical lifetime, we just add everything together. Make sure that in your initial year, you include the initial investment.
The number you calculate, a net present value (NPV), is a key measure for the CFO. It tells him whether the project increases the financial value of the company. If the number is positive, it means the Enacto project will increase the value of your company, and thus should make the company more attractive to investors. Net present value is a key measure that can summarize your whole business case for the project.
The payback period
Of course, there is also an easier version of the NPV, i.e. the ‘payback period’. The payback period tells the CFO how long it will take the company to recoup its investment from the generated savings. In general, our workshop calculations reveal that the use of Enacto results in an expected payback time of two to four years.
The financial and technical risk
Any CFO will also want to understand how much risk is involved in using Enacto. Enacto is a typical ‘pay-as-you-grow’ solution. So, it is easy to pilot first a sample of the total project and check the energy saving results.
Other drivers for energy management software in your company
CFOs will consider other factors as well:
Regions and countries link tax payments, subsidies or refunds to demonstrated efforts and energy savings. Energy management solutions like Enacto fit perfectly in this framework as they track realized energy savings, generate benchmark figures and legal reports automatically, saving precious time of the energy manager so he can focus on savings instead on reporting.
ISO reporting can be time-consuming and cumbersome. With Enacto it’s easy to generate standard reports, like ISO 50001 demands.
Corporate social responsibility
Energy management solutions help boost corporate social responsibility (CSR) in companies and help simplify reporting. With Enacto, you can demonstrate the impact of your energy consumption on the climate and community you operate in. Hence, it gives insights in how an operator, technician or facility manager acts to support the CSR targets of its company.
Carbon & emission trading
As carbon emissions are directly linked to energy consumption, Enacto can help you to influence, forecast and report on carbon and emission trading. It will warn whenever your company is about to cross the safety line of maximum emissions and it will help you to understand how many tons of carbon dioxide you can trade.
The calculation shows a positive business case, now what?
At this stage, you understand the project will create value for your company and that you qualified for additional benefits, like mentioned above.
Now the story needs to be presented to the CFO. Assuming his time is very limited and you will only get 20 minutes, make sure your story is easy understandable and focus on the key message only.
Ideally, prepare two slides. The first slide describes the executive summary of the project. It contains a short description and in large numbers the NPV. Your next slide will be a more in-depth description of the project itself.
This CFO may also want the proposal to be evaluated by his teams. Be prepared to manage your story and continue to sell it internally.
About Dirk Den Haese
Dirk Den Haese is the global director for Energy Management Solutions at Honeywell Home and Building Technologies, where he delivers integrated hardware and software solutions that help customers reduce energy costs quickly, economically, and with a minimum of capital expenditure.