One in every four dollars of capital invested is wasted due to projects not delivering enough value in relation their cost according to value delivery experts Jed Simms and Alexandra Chapman.
Simms and Chapman, the founders of consultancy Totally Optimized Projects, have co-authored a new book called The Capital Crime, accusing boards and senior executives of committing a ‘capital crime’ through negligent project governance, thereby defrauding their shareholders, customers and staff.
“Boards and executive teams are overseeing capital waste on a massive scale,” said Simms. “Capital wastage of 25% or more is not uncommon and yet capital investment processes are still treated as a ‘game’. I even had the chair of one major organisation’s investment committee admit to me that he ‘doesn’t believe any proposals’ and he ‘doubles the costs and halves the benefits’.”
The authors maintain that poor results from capital investment can have far reaching consequences. Research by The Boston Consulting Group, McKinsey and United Decisions into returns on capital investment show that the best firms generate returns on investment up to eight times greater than their poorer competitors. In the long run, assessed over 15 years, these firms outperform on EBIT measures by up to nine times and increase their share price by an additional 40%.
“With these results possible, you can see why we classify the current level of capital waste as ‘the capital crime,” underlined Simms, who left The Boston Consulting Group to found Totally Optimized Projects.
The acceptance of such wastage is unfortunately common, added Chapman. Managers believe that capital losses are a natural consequence of the risks of project investments whereas the the truth is “they pay too much for project investments, reap too little value in return and ‘concrete in’ higher than necessary ongoing costs and complexity into their businesses,” she said.
“This capital wastage affects everyone, it defrauds shareholders through lower share prices, defrauds customers through the provision of inflexible products and services, and defrauds staff by forcing them to work with overly complex and rigid operating processes.”
The book aims to make this connection clear. “Executives and boards are just not joining the dots between their underperforming investment evaluation and value delivery processes, and the resultant loss of competitiveness, reduction in returns per share and operational inefficiencies,” said Chapman. “In these straitened economic times, we say that it is time for boards and executives to ‘go straight’ and reap the rewards available from fixing capital and value delivery management.”
Targeted at boards and senior executives The Capital Crime is written as a fast-moving, entertaining novella about an executive team challenged to ‘go straight’. The book exposes the cost of the ‘crime’, together with the reasons why it persists before identifying the need to uplift the firm’s value delivery capability and suggesting alternative ways forward.
“This is a corporate capability issue: all organisations need to become fully capable of delivering the maximum available value from their capital investments,” noted Chapman. “We wrote The Capital Crime to quantify the problem and provide a solution specifically designed to avoid capital loss and wastage and its ‘criminal’ consequences.”
The current uncertain economic climate should be a driver of value delivery, Simms argued. “Now that capital is tight and the need to extract every ounce of value is critical, any board or executive team not addressing this matter urgently is choosing to continue to defraud its shareholders, customers and staff by committing the ‘capital crime’ when its persistence is no longer defendable.”
The book is available as a free ebook download and has its own website at www.thecapitalcrime.com, which provides additional information on more than 20 topics with bonus material that expands on the key points in the book and gives greater detail of the research cited and potential solutions.
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