Routes to Profitable Growth for North American Rail Companies Integrated Linear Asset Management Increases Operational Transparency

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Companies in all industries strive to improve the efficiency of how various functions and departments work, and freight rail companies are no exception. Most railroad companies made, and continue making, significant investments, capturing enormous productivity over the last few decades by, for example, streamlining crew size, increasing locomotive horsepower and tractive effort, employing distributed power, and improving freight car capacity. These efforts clearly reduced operating costs, in part due to strategic investments in technology that automated tasks in specific functions, such as maintenance of way and equipment. Yet, it is also true that railways frequently struggle with service performance,

particularly transit time variability which has been a difficult operational problem to solve. Although this issue has been mitigated by the fallen volume related to the current recession, once the volume rebounds it will become a challenge again. Current Accenture research on the North American rail industry1 shows that previous operational gains were not enough to earn an adequate return on invested capital (ROIC) for many railroads or the industry as a whole. This will become progressively more challenging as economic recovery takes hold and the rail business begins to grow in response to increased demand.

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What path will put more railway companies on track to improve their business performance to meet the long-term demand for capacity? Accenture’s ongoing research into high-performance business and our direct client experience hold some clues, as they have yielded important insights into how high performers distinguish themselves. Among our findings in studying more than 6,000 companies across a variety of industries: high-performance businesses act decisively at all times; they identify and seize opportunities in all business cycles, enabling them to outperform their peers in revenue growth, profitability, cash flow and total return to shareholders. Moreover, these businesses sustain and increase that superiority over time. We call the attributes of excellence that can transcend and unite otherwise

disparate organizations "competitive essence," which, in turn, is comprised of the three "building blocks" of high performance: market focus and position, distinctive capabilities and performance anatomy.

In the freight and logistics industry, we have found that market focus and position is characterized by relentlessly re-evaluating strategy to ensure that it aligns with clearly defined target markets, products and customers. In addition, we have found four distinctive capabilities underpin leading companies’ ability to create value: standardized processes, integrated information technology (IT), integration and collaboration, and innovation. Overall, this focus and these capabilities position leaders for long-term success.

Accenture’s perspective and experience show that a more holistic approach to managing rail assets and support systems will allow continued and accelerated operational and overall performance improvements while delivering the efficient and safe rail service expected. Accenture’s multi-faceted end-to-end approach to linear asset management (see Figure 1) is based upon our client experience in the rail industry and our proprietary research1.

Linear Asset Management

Integrated Asset Information & Technology Enablement (Location, Condition, Activity, Financial)

Strategic & Operational Planning

Linear Asset Physical Plant Maintenance

Financial, Human and Material Asset Management

Capital Planning

Operational Planning & Alignment

Maintenance Planning

Right-Time Dashboarding & Reporting

Decision Support

Track Assets

Signals & Communications

Condition Monitoring & Event Capture

Inspections

Notifications & Maintenance

Linear Asset Accounting

Time & Material Capture

Finance Integration

Material Planning

Joint Facilities & Recoverables

1Source: Accenture proprietary research from April 2009 analyzing published data from third party sources including Railway company financial reports, Commodity Systems Inc, the Association of American Railroads (AAR), Thompson Reuters, US DOT, Cambridge Systematics

Figure 1. End-to-end linear asset management

The productivity gains of the last couple of decades were real, and a testament to the industry’s ability to focus on performance indicators when necessary, whether to comply with regulatory requirements (for example, the Staggers Act) or respond to competitive pressures. However, research shows that the pace of productivity gains began slowing and then largely leveled off in the latter part of the past decade (see Figure 2).

What’s more problematic, is that continued investment in performance improvement depends upon positive and multiplicative returns on previous investments. Our analysis, however, indicates that many companies are not able to earn back their cost of capital, despite the productivity improvements of the last 20 years, leading to the conclusion that not all the drivers of

Lagging Performance Requires a New Linear Asset Management Approach

high performance have been addressed or exploited. Through Accenture’s research into the rail industry, we confirmed that sustainable performance relies upon improving three dimensions simultaneously: (see Figure 3) efficiency, revenue/profitability, and productivity/cost.

Employing Accenture’s linear asset management methodology is a constructive step rail companies can take to meet the challenges they face. These include national government goals for rail transport as there remain concerns that even after deregulation under the Staggers Act, rate competition and capacity in the United States remain uneven and at times, unpredictable. The challenges also include the more focused and immediate expectations of industry stakeholders, including transport

company stockholders, passengers, business partners and communities.

In the recent past, the emphasis was clearly on the third dimension—productivity and cost levers. Many rail companies adopted technology solutions that made back-office operations more efficient, and the industry as a whole benefited from the standardization of physical assets, from track gauge to knuckle couplers; air brakes to multiple unit (MU) connections, adding efficiency in an interdependent network. Accenture analysis indicates that the gap between ROIC and cost of capital will continue. This will not only undermine railroads’ ability to grow profitably, but will also limit funding for the infrastructure improvements badly needed to effect growth.

Revenue Ton Mile per Dollar of Inflation Adi Operating Expense Index (1980-2009)

Revenue Ton Mile (millions) per Employee (1980-2009)

300

250

200

150

100

1980 - 19966.1% CAGR

1996 - 20041.1% CAGR

Post 20042.3% CAGR

18

15

12

9

6

3

080 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

1980 - 19968.5% CAGR

1996 - 20044.5% CAGR

Post 20041.2% CAGR

Figure 2. Flattening operational productivity (1980–2009)

Source: US Freight Rail Road Producivity, Feb 2009, Association of American Railroads

Source: Rail Road Facts: 2009 Edition, Association of American Railroads

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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

RailROIC

Improved Capital Turns (Revenue/ Invested Capital)

ImprovedOperating Ratio

Asset Efficiency Levers • Increased asset availability (horsepower, network capacity) • Better visibility of asset location, condition and maintenance

activities • More informed capital planning decisions • Improved operations—improved velocity, terminal dwell times,

cars online • Faster equipment turns

Revenue and Profitability Levers • Improved visibility to asset lifecycle costs—as input to pricing

and contracting decisions • Faster responsiveness to changing market demand (evaluating

asset investments/ divestments)

Productivity and Cost Levers • Improved planning of maintenance activities and

coordination with rail operations • Improved tracking of unit costs • Improved safety and regulatory compliance

Figure 3. Linear asset management levers

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Accenture’s Comprehensive Approach to Linear Asset Management Putting railroads on the path to high performance will require refined organizational and operational skills. Skills that reduce route congestion and optimize line and car capacity, efficiently maintain and upgrade fixed and mobile assets, ensure the safety of passengers and communities, understand and respond to customers’ different service requirements, and address related environmental concerns. Accenture believes that by adopting the holistic approach to linear asset management outlined here—one that reflects both broad strategic needs and discrete operational capabilities—railroad companies can achieve these objectives, continue to grow profitably and position the entire sector to compete more effectively in the future.

Achieving positive returns and creating economic value are possible in the rail industry, but require more innovative and disciplined approaches to asset management that address enterprise-wide performance and not parts of an enterprise. An enterprise-wide approach will include developing a number of strategic and operational capabilities, such as:

• Aligning asset strategy with business and customer priorities.

• Committing to asset investment planning, prioritization and optimization.

• Focusing on increasing revenue and profit in addition to managing costs.

• Managing the entire lifecycle of assets—from inception to retirement.

• Understanding and creating value for multiple stakeholders.

• Ensuring data and information-driven decision making.

• Driving and influencing regulatory requirements and processes.

• Emphasizing and increasing the scope and breadth of operational transparency.

As shown in Figure1 and detailed below, Accenture’s linear asset management approach is designed to develop these capabilities in rail companies and provide the information and performance management tools that railroad organizations need to make sure they use and improve all the levers of performance.

An effective linear asset management approach is one that helps companies execute and adhere to their strategic and capital investment plan. Accordingly, Accenture’s approach provides tools and methods to facilitate strategic planning and decision making, expedite and enable better asset information and performance management, and monitor and document the condition of physical assets—from facilities to individual key components, such as signals, bridge work and combinations of interlocking components such as interlocking plants. Accenture’s approach to linear asset management allows faster decision making and better resource allocation to rail companies by providing the next generation of planning, information and plant maintenance tools and integrating them for optimal efficiency. Leveraging Accenture’s methodology, companies can spend less time generating data and consolidating the data into reports reviewed a month or two after a maintenance need is first identified. Leveraging current technology as a foundation, companies can achieve greater operational transparency, and can expect to see productivity improve across the company, from engineering, to IT and finance, to HR.

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Key Components of Accenture’s Approach to Linear Asset Management

A. Integrated Asset Information and Technology Enablement: Our linear asset management approach positions up-to-date technology as a key enabler of business performance in several critical areas. It includes a company-specific data model that allows companies to optimize typical back-office functions such as financial transactions and human resources planning, as well as develop scenarios for different physical asset configurations and enhancements to help plan for future investments. Technical management of documents relating to an engineering project and construction phases is easier through an SAP Document Management System that integrates with AutoCAD design tools and establishes hierarchical workflows for internal approval and revision processes. Further, having access to data from field events and track inspections means that all information railroad companies need to manage their assets is in one consolidated tool.

B. Improved Strategic and Operational Planning:Because Accenture’s linear asset management methodology leverages an SAP backbone, it can easily integrate enterprise business intelligence tools that providemanagement with productivity metrics and reports, compliance updates, and inventory and overtime analysis. The SAP backbone allows managers to quickly access and evaluate actual performance against budget/plan, variance analysis, and forecasting, and to make adjustments and trade-offs. Specific dimensions include: • Capital planning • Operational planning and alignment • Maintenance planning • Right-time dashboard and reporting • Decision support

C. Comprehensive Financial, Human and Material Asset Management:A tremendous amount of time and employee effort is expended to ensure that fixed and rolling assets, as well as track, are in compliance. Non-conforming assets translate into downtime and cost, which Accenture’s approach to linear asset management is designed to minimize. For example, Accenture has developed a track inspection mobile application in compliance with U.S. Federal Rail Administration and Transport Canada rules that captures condition data real time, and facilitates quick, compliant repair. This significantly reduces downtime, improving reliability and saving railroad companies the time and money it takes for multiple trips to an affected location. Other capabilities include: • Linear asset accounting • Time and material capture • Finance integration • Material planning • Joint facilities and recoverable

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D. Optimal Linear Asset Physical Plant Maintenance: In addition to rolling and fixed assets, every rail company has property, joint facilities and maintenance locations that need to be staffed efficiently and with appropriate inventory and assets that reflect traffic and typical conditions, among others. Accenture’s linear asset management methodology delivers tools that make it easier to assess whether physical plant components are being utilized most effectively, so that companies can identify, prioritize and analyze investments in physical asset maintenance programs. Components focus on five areas: • Track assets • Signals and communications • Condition monitoring and

event capture • Inspections • Notifications and maintenance

Several railways, including Canadian National and REFER Portugal, have successfully implemented the Accenture approach to linear asset management using the SAP platform, in whole or in part. These companies are now leveraging standard SAP objects for modeling the linear network. They have an integrated SAP solution for maintenance, financial and project tracking, joint facilities—both of which improve their business performance, increase operational transparency, and reduce their operational costs.

Our experience is that each of the components to our linear asset management approach is critical; leveraged together they deliver significant strategic and operational benefits. For example, widespread use of mobile technology can provide near real-time visibility into the status of fixed assets allowing maintenance or repair crews to be dispatched more efficiently, reducing waste, asset downtime and impact on operations. Similarly, standardizing and integrating enterprise systems on

one platform allows rail companies to more efficiently synchronize, manage and monitor operations involving multiple functions—something not easily accomplished when different departments have disparate software.

Whatever a company’s strategic investment plan includes, the benefits delivered by using the components of Accenture’s linear asset management approach together are substantial. Our methodology allows a rail company to tie strategies to budget decisions and allocations and then monitor progress to determine if plan goals will be met. From a company performance standpoint, strategic planning, technology and physical asset resources can be optimized to improve and expedite decision making, ensure the flow of accurate and timely information, and keep physical assets maintained and in compliance. The mix of pre-configured and tailored applications reduce a company’s solution development time and cost.

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A leading North American railway company operates thousands of track miles spanning Canada and the US. The challenge of maintaining tracks, cars and other rail assets is daunting, as is documenting inspections and reporting to various railway authorities. Railway inspections record no fewer than 20,000 track defects each year, and this railway company’s over 20,000 signal and communications locations are subject to one million regulatory tests annually. Without a comprehensive asset inventory and consolidated record of inspections, it was difficult to quickly respond to regulatory compliance requests regarding track condition and maintenance actions. Equally challenging was responding to signals and communications service bulletins.

A Case Study in Modern Linear Management

The client called upon Accenture to develop both mobile technology and a state-of-the-art track inspection solution that would make conducting and capturing field inspections less costly and time-consuming, and enable more accurate, real-time track condition information. First, Accenture helped integrate the railway's engineering and maintenance processes on the SAP NetWeaver platform to develop a single, consistent, accurate repository of engineering and maintenance records. Next, field workers were equipped with handheld devices which allowed them to navigate through screens of the inspection and condition repair lifecycle processes required by Canadian and US regulations.

The new mobile application eliminated the need for workers to commute between field and office locations to file inspection reports, reducing costs and improving work/life balance. A consolidated dashboard provided supervisors with territory overviews showing defects, compliance and work completion status. Automated labor and material distribution reduced the administrative burden and improved the accuracy of asset maintenance cost tracking. In addition to higher productivity in its personnel, the railway company’s new linear asset track inspection solution delivered clear, timely visibility into asset conditions.

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The Path to High Performance

Given the current and future capacity and compliance demands on the rail industry, the time is right for companies to take a more in-depth and holistic view of the asset efficiency, revenue and operating cost factors that can improve overall performance. More effective and efficient linear asset management as detailed by Accenture’s methodology can contribute to improving performance. The benefits of adopting a more comprehensive approach to linear asset management, one that includes common processes and technology, are multiplicative because they target all capabilities that impact business performance—strategy, systems, processes, and management of physical and human assets. With the right strategies and tools, rail companies can once again make impressive performance gains and deliver on the industry’s promise of being the critical link in the transportation sector.

To learn more about Accenture’s capabilities and solutions for the rail industry visit Accenture.com/freightrail or contact:

Brooks BentzSenior Executive, Transportation, North Americabrooks.a.bentz@accenture.com+1 617 488 4808

Elias ScarvelisSenior Executive, Transportation, North Americaelias.b.scarvelis@accenture.com+1 514 848 1660

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Accenture is a global management consulting, technology services and outsourcing company, with more than 190,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehen-sive capabilities across all industries and business functions, and extensive research on the world’s most success-ful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

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