How Risk Analysis Powers AgustaWestland Decisions
Palisade’s risk analysis software informs decision-making process
AgustaWestland, the Anglo-Italian helicopter company owned by Italy’s Finmeccanica, uses risk analysis software from Palisade to develop financial business cases and feasibility studies to produce in-depth analysis on the costs, risks and financial sustainability of potential new products. This informs the company’s decisions on which products it will develop and manufacture.
Challenges of Developing New Helicopter Models
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 at AgustaWestland uses RISK, (part of Palisade’s 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.
Helicopter Manufacturer Agustawestland Uses Risk To Inform Major Company Decisions
Building Deterministic Financial Models With Excel
AgustaWestland first builds a ‘deterministic’ Excel model to predict key financial outputs such as revenue, net profit, Net Present Value (NPV), Internal Rate of Return (IRR) and financial break-even. Inputs to the model include: the cost of engineering studies for the design and development of the new product; prototype manufacture; flight tests; certification; the number of helicopters planned for manufacture per annum over a 20-year period; recurring helicopter unit costs per system / subsystem; and the spare parts that will be required over the helicopter’s lifecycle. Financial parameters such as inflation, the weighted average cost of capital, bank interest rates, and exchange rates in different currencies are also accounted for.
Implementing Monte Carlo Simulation With RISK
AgustaWestland then carries out Monte Carlo analysis using RISK to determine the accuracy of the forecasts and the way to improve the business both in true feasibility and in financial results. It is essential to take uncertainty into account because the economic situation cannot be predicted with any great accuracy, especially when the business cases are based on a period of 20 years. RISK makes it possible to evaluate in advance how changes to the inputs will impact key financial outputs and, with this insight, implement mitigation actions.
Identifying Key Inputs Using RISK Graphs
Using RISK graphs, AgustaWestland can see which inputs have the greatest effect on the financial outputs, and therefore require attention to be focused on them. For example, specific discussions with the engineering department to determine mitigating actions could potentially keep recurring costs under control if the graphs show that these have the greatest impact on the financial outputs presented in the business case.
“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 Decision Tools 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.
