If you have a CapEx approval request in front of you, chances are it’s full of ‘pros’ and not many ‘cons’, or at least not the real ‘cons’. The ‘cons’ you really need to understand to make the best decision. They’ve become lost, not on purpose, but because the process to allocate capital makes it almost inevitable.
Ultimate decision-makers are presented with a narrowed down set of yes/no approvals that have been shaped by the need to beat other business units who are competing for a limited capital investment pool. That competition becomes a distraction of internal politics when there should only be one driver; committing capital to maximise business benefit against a challenge or opportunity.
It’s not a trivial problem to solve and most strategies to do so, like using an independent programme office, still end up descending into a beauty contest of who can best justify their projected benefits.
The most powerful tool at your immediate disposal is to ask the right, very pointed ‘what if …’ questions. This not only improves your ability to make the right decision, it shapes the preparation and analysis that goes in to proposals and sends a clear message around CapEx scrutiny.
Question 1
How inaccurate or wrong do the requirements in the business case have to be before the proposal looks like a bad investment?
We know that the requirements have been tested because they are the cornerstone of the proposal – but are they exact or are they a best-guess based upon a range of future unknowns?
It is one thing to add a production line against a specific, long-term client commitment that effectively underwrites the investment. However if your investment is driven by demand projections based on past performance, current commitments and future sales – then it is naturally inexact. If that’s the case, then I expect you would want to know how sensitive the amount of investment is to the actual output required. We have seen multiple examples of;
- A negligible reduction in output capacity significantly reducing capital required; as it allowed the use of off-the-shelf equipment and removed the need for bespoke sizing, or
- A minor increase in initial CapEx cost having a massive impact on production capacity (recent example was +5% capital upfront led to +50% capacity) – for example, by removing a production bottleneck.
It’s questionable whether the extra capital cost is wise if your demand is exact and the extra capacity is purely speculative – but is very good use of capital if your demand expectations are a best guess and could be out by tens of percent.
By questioning the sensitivity of the business case you can find out if the business unit and the project team are really communicating!
Question 2
What are the benefits and consequences of spending more or less upfront?
Like the first, it is a question based around sensitivity – the impact of investing more or less on the result you achieve.
It is also left-field so you may not get a good answer the first time you ask. It however drives the team to re-evaluate the case in detail, and rather than assume a straight line relationship between upfront spend and added capacity, draws attention to potential extra value – particularly when your future parameters aren’t fixed
Question 3
What are you going to spend to maintain and operate over the life of the investment – and why?
Similarly, an analysis of what a design will cost to operate, maintain and upgrade over its life and how sensitive that cost is to the technologies / configurations and manufacturers that you select, drives a different level of thinking and opportunity spotting.
Yes, organisations generally now question lifecycle cost as part of the sign off process but very few look to the point of understanding sensitivity and identifying design opportunities. With 80%+ of the cost for technical equipment being spent in the operational phase of the lifecycle, the emphasis on upfront CapEx commitment can be misplaced.
We have found that these 3 key questions can shape the preparation and analysis that goes into a project.
By asking them you can drive your team, and the individual functions (operations, finance, engineering) to collectively consider multiple scenarios – not to consider options in isolation and then pass on their best one to the next team, who in turn consider their options in isolation.
This drives a collectively focus on business impact, rather than just on the specification hurdle they have to achieve to minimise CapEx outlay.
