How you allocate capital directly impacts your future operations, competitiveness and profits. You invest your capital to build your future capabilities and your agility, to improve performance and to fix problems. Capital management is a mission-critical process that most organisations do poorly.
They struggle to generate a prioritisation process that objectively identifies the priority investments. Instead, investments are selected on a ‘keeping all divisions happy’ or historical precedent or executive salesmanship bases.
An organisation was asked to reassess its top ten projects: ‘Were they really a priority?’ This simple exercise brought into question the project currently ranked priority number two.
“Why are we doing this?” the executives asked. The answer, it turned out, was that it had been championed by the then executive in charge (who had now left), been well promoted and accepted and then no one questioned it again. This is how projects can be prioritised (poorly).
In too many organisations prioritisation and capital allocation is seen as a game. There’s a pot of gold there for the taking if you can put up a feasible business case. The business case then becomes a ‘dash for cash’ rather than a business investment contract between the sponsor and the organisation. Funds once allocated are rarely returned or well accounted for. You may know where they’ve been spent, but not what value they have delivered.
And so we could go on. The problems with current prioritisation processes are well known, and too often experienced.
The root problem is that effective prioritisation requires a series of tools, techniques and processes to be in place (but rarely are) to enable each project, program or proposal to be assessed and prioritised on a consistent basis.
The strategic prioritisation prerequisites are a:
- Strategic contribution measurement tool
- Value optimisation tool
- Standard risk assessment tool
- Capability-to-deliver assessment tool
- Capacity-to-deliver and absorb assessment tool
- And a thorough validation process.
- Without these tools and processes in place your results will always be compromised.
1. Measuring strategic contribution
Can you immediately identify exactly which projects are contributing to each strategic imperative (driver of strategic results) and how much each project is contributing and when this contribution will be delivered?
Many organisations may be able to list the projects that are ‘aligned’ to some general strategy statements (eg “Increase market share”) but will rarely know the nature of the contribution to be made. Yet, each project’s strategic contribution determines its strategic relevance and should be the first criterion assessed. If a project is irrelevant to the organisation’s strategy, why would you do it? You’d be diverting capital and resources away from your desired direction.
Our research has found at least 15% of projects underway in any portfolio are strategically irrelevant. If you include all of the minor enhancement projects, then the strategically irrelevant figure can go up to 80% of the project portfolio.
This is a massive waste. But also an opportunity as when you eliminate strategically irrelevant projects from your portfolio you release massive capacity and capital to invest in strategically relevant projects.
2. Measuring benefits and value
How confident are you that the benefits claimed in each business case are real, achievable and represent all of the benefits that are available, that is, you’re not leaving millions in benefits on the table unidentified?
Most organisations do not know the answer to this question. Audacious benefits claims may be discounted, but if there are benefits missing or benefits claimed that cannot be delivered by this project, they don’t know.
Worse, your organisation’s processes may be contributing to benefits minimisation and value reduction.
Most organisation’s business case processes are actually (inadvertently) designed to minimise the benefits captured in the business case to ‘just enough’ to get the business case approved. “Why identify any more benefits (and put yourself on the hook for them) if you don’t need to?” is the rationale.
Benefits are, therefore, treated as a means of justifying the project’s delivery costs. This is entirely wrong and upside down thinking. The costs should be seen as the cost of delivering the benefits.
The only reason you do projects is to deliver some benefits. If you commission a project but don’t get the benefits then you are worse off than before as you have incurred the cost and pain for little to no gain.
But there is another dimension to this. If you invest the capital but only deliver some of the benefits available you have lost out again, perhaps not so much but, we have found, you may have missed, lost or destroyed more than 50% of the value that was available. Now that is a massive waste.
Sloppy benefits identification, evaluation, delivery and measurement processes routinely combine to halve the net value actually realised. Or, to put it another way, you can double your returns on investment by improving how you identify, define and deliver projects and their benefits.
3. Measuring deliverability
Any level of strategic contribution and value is worthless if you cannot deliver it. A project’s deliverability is too often assumed. There are three main considerations in relation to a project’s deliverability:
The level of risks and threats to the success of the project.
The concept of risk management is, or should be, central to project management. However, for prioritisation purposes, each project’s risk level must be comparable. Relying on the risk identification skills of the project team is not good enough. Each project needs to assess its risk profile against a standard set of risks so that the results can be compared across projects of different types.
A comparable risk profile will reveal if too many projects are too high-risk to all be successfully managed and delivered. Most organisations can undertake one or two high-risk projects simultaneously; any more than that and the resources and management focus are stretched too thin and become ineffective.
The organisation’s capability to deliver value from its project investments.
The concept of measuring an organisation’s ‘value delivery capability’ is not common. The impact an organisation’s capability has on its project results is based on BCG research that identified a direct correlation between how an organisation is set up to define and deliver projects—its value delivery capability—and the results it achieves over time.
The idea that ‘how good you are at delivering value determines the value you deliver’ seems self-evident, but is not currently measured. Organisations do not know their capability level—ie what types of projects they can successfully deliver. And each project does not know what level of organisational capability it needs to be successfully delivered.
Into the gap between what the project requires and the organisation can deliver falls massive value. When organisations take on projects beyond their capability to deliver these projects go over time, over budget, under deliver or fail completely.
The organisation’s capacity to both resource the project and absorb its outcomes.
The capacity limitation is more often encountered. Organisations usually run out of the resources to put on projects before they run out of capital to allocate. Your project’s results are determined by who is on the team. Each team will deliver a different result. Put the ‘B’ team on a project and you’ll have a ‘B’ result delivered. And the availability of the ‘A’ team is limited. When you run out of ‘A’ team resources, you run out of the opportunity to deliver ‘A’ quality results. Managing the allocation and use of your ‘A’ team is as important as managing the allocation of your capital.
There is another dimension here too—the capacity of the business to absorb the planned level of change. Too much simultaneous or continuous change can create chaos and staff resistance. Organisational change needs to be managed to not overload any one area with too much change at one time.
While resource capacity is commonly tracked, change absorption capacity is often overlooked but is fundamental to whether or not you’ll generate the returns available from your investment.
There is one more critical dimension to effective prioritisation: validation. You cannot take the business case and its delivery plans at face value, you need to validate them thoroughly. You need to take the business case and plans apart and critique each aspect to ascertain whether it is correct, consistent, relevant, complete, etc.
Thoroughly validating projects and their business cases ensures that what is proposed exists, is planned to be delivered, the costs are accurate, the benefits have been fully identified, the planned change activities are complete, and so on. Problems found at the prioritisation stage can then be corrected at far lower cost than at anytime later. Now is the time to ensure the project is complete, correct and set up for success.
A validation process enables those accountable for capital management to know that the proposals:
- have been thoroughly vetted before being submitted for approval
- have had all of the bases for prioritisation objectively assessed
- see the business case and project aligned
- see the project set up for success.
Now the only remaining question of projects that have passed all of the criteria of the prioritisation process is: ‘Is this a project we want to do at this time?’ If it is, the project can be approved. If not, the project can be deferred or rejected.
However, now you can be assured that when you allocate your capital, each approved project is strategically relevant, worthwhile, deliverable and set up to successfully deliver your future operations, competitiveness and profits. It really is that simple.
This post was originally published as ‘How To Prioritize Your Capital Investments‘ and has bee re-posted with permission. It has been edited for length.