HOW DO YOU PRIORITISE CAPITAL INVESTMENTS?

“They’ll all tell ya it’ll rain toads!” the boss used to say. Indeed, many did say they needed operating capital (Capex) lest there be dire consequences.

Capital programs can be cut and diced may ways, but we liked to stratify them into four types. First, capital was required to meet customer demand. Second, the business needed capital to replace worn-out equipment (Lifecycle). Third, there were investments we needed to make to keep us compliant with the law (Compliance). Fourth, those things we needed to do to improve the business (Opportunity).

Customer Demand Capex did not need a business case as it was a sausage machine requirement, more of the same low risk repeatable projects to connect customers to our infrastructure. Unit cost reductions were key requirements. Lifecycle Capex could be risk managed on a likelihood and consequence combination basis. Compliance Capex similarly could be risk managed. Opportunity projects however proved really difficult to rank. If you added up all their promised returns, they totalled more than the GDP of Spain. If you said to them we’ll give you the capital and we’ll add the projected returns to your profit targets, they only liked half of that deal – the first half. There was a plethora of dubious reasons why capital was required, eg. for “customer retention purposes” or it was essential for “strategic purposes” or “we need it to complete what we’ve started”. This last one was really code for “we stuffed up the funding estimate”. Yes, they’ll all tell ya it’ll rain toads!

How did we try to fix this? In short, if managers were not prepared to take on risk for capital, there was no capital. If you can focus people’s minds, it is truly astonishing what disciplines it engenders.

It’s funny you know, it never rained toads! 

  • 2015-02-17 11:24:23
  • Mark Spicer
  • Investment Prioritisation, Efficiency and Effectiveness, Governance