94  Valuation of ESG and Digital Initiatives
the grandly named robotic process automation (RBA). This doesn’t refer to 
physical robots, but rather to software that automates processes like accounts-
payable processing. As these robots become more sophisticated, they can take 
on even more difficult tasks, handling exceptions in addition to plain-vanilla 
accounts payable.
Some examples show great progress for this kind of cost reduction. One 
mining company saved over $360 million per year from process automation 
in the field that gave managers more insight into what exactly was happening, 
enabling managers to make adjustments and anticipate needed ones. Fossil-
fuel power generators have improved a plant’s heat rate (how efficiently the 
plant uses fuel) by up to 3 percent by using sensors and actuators for remote 
monitoring and automated operations, as well as employing smart valves that 
self-report and repair leakages. They’ve also used automated work-order gen-
eration, remote expert support using virtual-reality devices, and automated 
warehouses to reduce operating costs by 5 to 20 percent. At the same time, 
they have improved safety by using robots for tasks in confined spaces, as 
well as advanced analytics to prevent accidents due to fatigue or distraction.18
Understanding the economics of cost reduction is not as straightforward 
as it may seem. You might be tempted to estimate the present value by simply 
discounting the expected savings and subtracting the investments required. 
But you also must examine the second-order effects. Are your competitors 
pursuing the same initiatives? In a competitive industry like the chemicals 
business, those cost reductions might simply be passed through to customers 
as price reductions. Chemical companies typically find ways to reduce costs 
by around 2 percent per year, but their margins don’t increase, because indus-
try players pass the savings on to customers.
In a situation like this, where the present value of cost reduction efforts is 
zero because the savings are passed on to customers, the alternative case be-
comes important. If your competitors are pursuing digital initiatives to reduce 
costs and you are not, you’ll still have to reduce your prices in line with your 
competitors’. The alternative to the digital initiative would be a decline in 
cash flows due to lower prices without reduced costs. So the present value of 
the initiative may turn positive again, once you compare your initiative to the 
right base case. In practice, whether the savings are passed on to customers 
will vary by industry, but it’s critical to think carefully through the alternative 
case.
Improved Customer Experience  Consumers have benefited tremendously 
from the digital actions of companies serving them. Many retailers have ­become 
“omnichannel,” giving consumers a high degree of flexibility. ­Consumers can 
18 G. Guzman, A. Prasanna, P. Safarik, and P. Tanwar, “Unlocking the Value of Digital Operations in 
Electric-Power Generation,” McKinsey & Company, October 2019, www.mckinsey.com.