Transform & Thrive - Insights

L.E.K. Thought LeadersL.E.K. Thought LeadersLeveraging AI for Performance Improvement

Artificial intelligence is increasingly becoming a cornerstone of business strategy, offering transformative potential for performance improvement. This article explores the opportunities AI offers, highlights challenges in evaluating its potential benefits, and outlines critical success factors for effective integration.

Opportunities for AI integration

AI is reshaping the way businesses operate, offering solutions to tackle long-standing challenges and unlock new growth. Key pathways for performance improvement include:

• Operational streamlining: AI-driven automation optimises workflows and reduces inefficiencies. Logistics companies use AI-powered route optimisation to lower delivery times and costs.
• Predictive analytics: Advanced AI models forecast trends, enabling proactive decision-making. Manufacturers apply predictive maintenance to minimise downtime and extend asset lifecycles.
• Data utilisation: By extracting actionable insights from complex datasets, AI turns information into a competitive advantage. For instance, healthcare providers analyse patient data to predict health risks and personalise treatments.

Challenges in AI deployment

While AI offers immense opportunities, successful integration poses challenges. Key hurdles include:

• Quantifying ROI: Measuring AI’s impact can be difficult as benefits like efficiency or decision-making are often indirect and not easily translated into financial outcomes. This complicates decisions about appropriate investment levels.
• Scalability and integration: Scaling AI across an organisation often reveals integration issues with legacy systems and escalating costs, diminishing returns on initial successes.
• Adoption speed: Ambiguity around timelines for execution and adoption can delay benefits. Resistance to change and underestimated training or implementation needs could further slow the realisation of AI’s potential.

Critical success factors

To effectively harness AI for performance improvement, organisations should focus on:

• Clarity of purpose: Define measurable objectives to address ROI challenges and focus on areas with high-impact potential.
• Change management: Ensure smooth adoption by securing stakeholder buy-in, providing robust training and setting realistic timelines for execution.
• Ethical implementation: Safeguard data privacy, address potential bias and ensure transparency to build trust in AI solutions, while ensuring effective implementation.

Looking ahead

As generative AI and other advanced tools become more accessible, organisations have opportunities to innovate, deliver higher performance, enhance customer service and improve financial results. At L.E.K. Consulting, we help organisations navigate these opportunities by providing tailored strategies for AI integration, addressing key challenges and unlocking AI’s full potential. Our performance improvement and data analytics experts team up to ensure that initiatives uncovered bring tangible value and are implemented.

Creating Value in a Concession Industry Subject to Investment Catch-Ups

Infrastructure investing is generally regarded as less risky compared to certain categories of private equity. This is largely due to its reliance on revenue resilience over long time horizons, which ensures the ability to manage regular maintenance and renewal activities, thereby maintaining asset sustainability while servicing long-term debt repayments.

While these investments benefit from stability and deliver attractive returns, they are not immune to challenges that can gradually undermine their business models. For instance, wastewater treatment facilities face increasing risks from adverse weather events driven by climate change, such as heavy rainfall that causes plant overflows, leading to pollution incidents. Compounding this issue, stricter environmental regulations aimed at reducing pollution incidents may result in higher fines or necessitate substantial catch-up capital expenditures (capex) for utilities.

Over the past few decades, many infrastructure assets operating under concession agreements have experienced growing pressure from the need for catch-up capex, often referred to as an “asset deficit.” As long as mechanisms exist to generate additional revenue over time – enabling the allocation of capex to address this “asset deficit” – there remains a potential to recover and restore the anticipated return on equity.

However, there are situations where the renewal of concessions may be jeopardised by the need for revenue increases. Competitors, for example, might have made more strategic investment decisions, resulting in more efficient asset management practices that minimise asset deficits and reduce the scale of required revenue increases. This raises an important question: why should end consumers bear the financial burden of an underperforming operator’s inefficiencies?

If these challenges are not addressed in a timely manner, the accumulation of deferred investment catch-ups to resolve an asset deficit can create a vicious cycle. Infrastructure companies may need to expand their engineering capabilities and engage additional contractors in an already constrained market, thereby driving up the unit cost of capex.

Delaying catch-up capex in an effort to manage costs incrementally can exacerbate the issue, potentially leading to increased maintenance expenses or regulatory fines as assets deteriorate. When operating within a fixed budget, this prioritisation of operational expenses (opex) over capex can result in further capex shortfall. As the end of the concession approaches, renewal capex becomes an increasingly formidable challenge.

Infrastructure companies facing environmental or operational changes that elevate the risk of asset deficits have several strategies at their disposal. These include streamlining opex by improving procurement processes and productivity, optimising capex unit costs through standardisation, renegotiating concession terms based on precise cost data demonstrating necessity for revenue increases, or securing longer remedial periods to avoid additional costs such as fines.

The most successful companies, however, are those capable of designing and executing comprehensive transformation programmes. Such programmes provide a holistic framework to address these challenges, leveraging all available levers while clearly articulating expected financial outcomes, key enabling projects to make it possible, and the associated funding solutions.

Plans must involve collaboration with all key stakeholders – including management, end consumers, regulatory authorities and investors – to ensure the recovery of sustainable performance and long-term value creation.

To find out more about transforming infrastructure assets, please contact Jean-Philippe Grosmaitre .

Breaking Operational Gridlock and Restoring Profits for an Auto Accessory Manufacturer

A leading automotive accessory manufacturer found themselves trapped in a cycle of declining profits and constant firefighting. Operational inefficiencies, fueled by rising costs and falling productivity, had pushed the business into negative EBITDA territory. This manufacturer needed a swift and effective solution to break free from these constraints and regain control of their operations.

The L.E.K. team conducted a thorough diagnostic of the entire supply chain, identifying key areas for improvement. They then implemented a high-velocity iteration cycle, focusing on quick wins through tactics like takt time analysis and materials requirements planning. By working closely with the client on the factory floor, L.E.K. ensured seamless integration of improvements and minimised disruptions to operations.

This collaborative approach delivered immediate and measurable results, with an 8-percentage point improvement in EBITDA achieved in less than a quarter. The L.E.K. team provided the client with a comprehensive playbook and implementation roadmap to sustain and replicate these improvements.

Read the full article here to explore how L.E.K.'s Organisation and Performance team can help you break free from operational gridlock and achieve transformative outcomes.

L.E.K. Thought Leaders

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Claudio Molinaro, Partner; Jean-Philippe Grosmaitre, Partner; Tom Marshall, Partner; Sebastien Beausoleil, Principal;