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.
The problem with prioritization
However, most organizations do it poorly. They struggle to generate a prioritization 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 organization 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 prioritized (poorly).
In too many organizations prioritization and capital allocation is seen as a game.[1] 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 organization). 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 prioritization processes are well known, and too often experienced.[2]
The root problem is that effective prioritization requires a series of tools, techniques and processes to be in place, but which rarely are, to enable each project, program or proposal to be assessed and prioritized on a consistent basis. [3]
The strategic prioritization prerequisites are a:
- Strategic contribution measurement tool
- Value optimization 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.
However, there is a prerequisite to any effective prioritization process - the executive management team must care about and want to prioritize project investments effectively.
For too many executives, capital is the last great slush fund available. If you can get it, you are rarely held accountable for the returns on the investment funds. It’s a wonderful, carefree spending opportunity.
However, capital management is a core capabilty that executive management should take seriously. McKinsey identified that effective capital management made a significant difference to organizations’ performance.
“Companies that reallocated more resources (capital)—the top third of our sample, shifting an average of 56 percent of capital across business units over the entire 15-year period—earned, on average, 30 percent higher total returns to shareholders (TRS) annually than companies in the bottom third of the sample.” [4]
Capital allocation and management are critical to your organization’s future success. It should not be treated - as it too often is - as a game. Formal procedures, processes, evaluation committees may all exist, but these elements consistently lack the necessary specificity, objectivity and consistency.
1 Measuring strategic contribution
A quick test for you.
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?
Now many organizations 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 organization’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.
A bank was unable to launch new Treasury products due to a lack of IT resources. However, 25 IT resources were allocated to developing a custom-designed staff wardrobe management system. As there was no formal prioritization process the wardrobe system (a pet project of the executive overseeing IT) was commissioned and funded while the potentially revenue-generating Treasury products were put on hold. Which project do you think more closely aligned with the bank’s strategy?
Effective measurement of each project’s strategic contribution is the first tool required and very, very few organizations have anything worthwhile in this area. “Strategic alignment” is the norm and this is wholly inadequate—too high level, too vague and too open to gaming.[5]
Measuring benefits and value
A second test for you.
How confident are you that the benefits claimed in each business case are real, achievable and represent all of the benefits that are available? (ie that you’re not leaving millions in benefits on the table unidentified)
Most organizations 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 organization’s processes may be contributing to benefits minimization and value reduction.
Most organization’s business case processes are actually (inadvertently) designed to minimize 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 do not believe your project will deliver some benefits, you’ll stay with the status quo. 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 realized. 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.
This lack of focus on benefits has permeated orthodox approval processes. Many business cases have a ‘cost/benefits analysis’ section. Notice the sequence of these words—costs first, benefits second. At a minimum it should be ‘benefits/cost analysis’ or, even better, a ‘Value Equation’ that spells out the total value available (desired business outcomes, benefits and value) plus the change activities required to deliver this value. Very few business cases have a space for the components of a Value Equation, they only have space for some loosely linked cost and benefit calculations.
If you cannot identify and quantify ALL of the value available from your project investment, you are not going to realize it and your return on investment will be compromised—often by over 50%. Can you afford this level of waste?
An effective Value Equation definition tool equips you to identify all of the value and plan for its delivery.[6]
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 organization’s capability to deliver value from its project investments
- The organization’s capacity to both resource the project and absorb its outcomes.
High-risk levels or inadequate capability or capacity mean that the proposed value may not be delivered—in part or in full.
Comparable risk measurement
Research consistently confirms that around 40% of projects leave their organizations worse off than before. The capital cost of the investment has been incurred, the disruption of implementation has been endured and, at the end of the day, things are worse than before (and, usually cannot be easily remediated).
For example, a utility ‘rammed in’ (their words) a project after five years of development at over four times the original cost that then paralyzed the organization. Basic processes did not work. New, hard-wired controls were stopping people working. Key processes were missing. While a lot of effort was expended to get the place operating again, on the one-year anniversary of the system’s implementation the staff voted that they were worse off than before. And they were right. Unfortunately, this is not an isolated example.
The concept of risk management is, or should be, central to project management. However, for prioritization 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 organizations 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.
Capability measurement
The concept of measuring an organization’s ‘value delivery capability’ is not common. The impact an organization’s capability has on its project results is based on BCG research that identified a direct correlation between how an organization 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. Organizations do not know their capability level—ie what types of projects they can successfully deliver. And each project does not know what level of organizational capability it needs to be successfully delivered. Into the gap between what the project requires and the organization can deliver falls massive value. When organizations take on projects beyond their capability to deliver these projects go over time, over budget, under deliver or fail completely. Sound familiar?
To ensure the project can be successfully delivered you need to be able to assess that it is within the organization’s capability to deliver successfully. This assessment is very rarely done.
Capacity measurement
The capacity limitation is more often encountered. Organizations 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. Organizational 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.
4 Validation
But there is one more critical dimension to effective prioritization—‘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 prioritization 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 bank validated the last six approved projects (as part of the bank team’s validation training). Five of the six projects failed the validation process—each for a different reason. One year later, one of the five had failed and the other four were struggling.
5 Approval
A validation process enables those accountable for capital management to know that the proposals they are seeing:
- have been thoroughly vetted before being submitted for approval
- that all of the bases for prioritization have been objectively assessed
- the business case and project are aligned
- and the project is set up for success.
Now the only remaining question of projects that have passed all of the criteria of the prioritization 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.
And you can do it in your organization with the TOP Prioritization tools, techniques and processes on the Project Prioritization Center of Expertise.
[1] This ‘game’ is explained in TOP’s book, “The Capital Crime” available from www.totallyoptimizedprojects.com
[2] “56% of (UK) organizations believe their prioritization process is ineffective” “Delivering value from IT” Edwards and Lambert, Focus Winter 2005 (Cranfield School of Management)
[3] For simplicity of reading, we refer to projects, programs and proposals as ‘projects’ from hereon in
[4] “How to put your money where your strategy is” Hall, Lovallo, Musters, McKinsey Quarterly March 2012
[5] TOP’s Strategic Contribution Assessment Tool effectively and objectively measures each project’s exact strategic contribution and is available as part of the TOP Prioritization Program.
[6] The TOP Value Equation™ is available as a separate module and as part of the Prioritization Center of Expertise.
