How to Reduce the Complexity of the Investment Decision Process

It is often the case that companies are tied up by bureaucracy, making investment procedures like approval processes complex, cumbersome, and confusing. When it comes to CapEx approval, there are many variables that come into play that push and pull the process in different directions, making it hard for leadership to actually make a decision about an investment.

A question arises: is it possible to make the approval process more effective? Answer: In order to do so, the internal decision-making process has to be challenged; after all, it has been found that 15-30% of CapEx savings were consistently delivered through portfolio optimization.

From executives and CFOs, to committees, or boards, making a decision must mean making a judgement call as to whether the expected benefits of the investment are going to exceed its costs. Approvals need to be based on the knowledge of what will happen later on down the road. And, this is often hard to predict.

In the real world, analysis, spreadsheets, and graphs lead to confusion. But, forward-thinking businesses have understood that knowing the factors on which a decision is rendered requires a process that is streamlined, and transparent.

Decisions are captured in a measure that’s called “residual cash earnings,” RCE is a cash-flow-based on “economic profit.” Setting aside the process of analysis and metrics, it becomes possible to focus on residual cash earnings, and its drivers.

Let’s say a $10 million investment in equipment would improve product quality, and sales growth. You have to make a judgement call.

Will the project be complete within a budget? Will it improve corresponding areas of the business? These questions make the decision process complex, and the reasons for this are:

  1. It’s human nature to avoid being in the middle of making decisions that could be later proven wrong.
  2. Drawing up continuous analysis can result in ‘analysis paralysis,’ where growth and innovation is restricted. There could be a conflict, and the process of taking a course of action could be a complex decision to arrive to.
  3. It could be tempting to choose a particular analysis that works to best support the decision-maker’s opinion. When this happens, the analysis isn’t used to arrive at a decision, but rather to justify an opinion.

Public companies should take note from private corporations, as they have learned how to simplifying the decision process. After all, when it is your own money, you’re careful – when it isn’t, you’re less worried.

If you are operating a public company, embrace the mindset of  a private company to reinforce a simple and clear decision process with accountability for delivering results, and making smart investment decisions.

To help executives make informed decisions, there has to be complete internal transparency across the project portfolio. Connecting its value to all parts of business workflows means implementing formal capital-review processes.

Capital productivity is critical, but it is an often underused value lever in capital-intensive industries. The CFO who understands this, knows where to plug in and how to push forward to make a difference in boosting return on investment and free cash flow.

In conclusion….

Complex or sensitive million-dollar investment with a payback timetable that stretches on for years requires making the right decisions as to where to invest. The right call can transform a company’s value. The wrong one can entirely damage it.

Making a decision on which projects to invest in affects revenue and cost in a big way. Ensure that your executives have the resources in place to make such decisions.

Implementing and integrating technology makes it possible to let all data flow between and across the organization as a whole. It has become increasingly clear that the optimal solution for project technology means that all systems speak to each other, and data flows seamlessly from the initial project outline to the final decision-making process.

 

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