Capital can be 'allocated', 'managed' or 'optimized'. Too often it is just wasted.
The true cost of this capital is not the interest rates the banks charge – it is the business opportunities missed, the competitiveness lost and the effort and capital wasted as a result of poor capital investment returns.
While capital is tightly controlled and allocated, the results and returns are loosely ‘hoped for’. Despite millions if not billions having been spent on ‘project management’ and the like tools and training, the returns on capital investment are not increasing.
Research by McKinseys, the Boston Consulting Group (BCG) and others shows that an organization’s ‘investment management, execution and value delivery capability’ is key to its returns on investment, as well as its EBIT and share price over time.
An organizations' lack of an effective execution capability results in capital being lost and wasted on a massive scale worldwide. We have found that 25% or more of an organization’s annual capital spend can be lost or wasted.
This capital loss and waste is “The Capital Crime”
"The Capital Crime" is the title of an entertaining novella by Jed Simms and Alexandra Chapman that illustrates why that the financial and operational impacts of this ‘crime’ are only now being seen at the board and executive levels.
The level of value loss, waste and destruction on capital investments is more prevalent than managers realize, as many of the types of loss are not measured by the orthodox tracking and reporting processes.
But the upside is also massive. Research conducted by Totally Optimized Projects found that, while most organizations are still struggling to break even across their project portfolio, the top performing organizations are generating up to eight (8) times the returns from their capital investment projects.
This is a business issue. Too often delivery of projects has been delegated to the IT or project fraternity; it needs to be owned by the business. Only when the business focuses on ensuring that the desired business outcomes, benefits and value are fully realized will the capital losses go down and the returns go up – exponentially.
Realistically, some level of capital waste has been inevitable as the processes relied on to deliver investment results have been deficient, missing or mis-focussed. Orthodox project delivery processes are basically designed to efficiently deliver projects. They are not inherently designed to deliver business results and value. This is illustrated by the fact that “benefits management” is seen as an extra step that is only now being added at the end of project delivery schemas.
Many key steps and processes required to deliver all of the business value available from capital projects are either missing completely or deficient. Either way capital is irretrievably wasted and continuance of this capital wastage and the lack of focus to address it is the ‘crime’.
When this value delivery deficiency is added to the ‘games’ played to get capital projects approved – when costs and benefits can be deliberately understated to be ‘just enough’ to get the investment approved, for example – we have a crime in progress.
“The Capital Crime” of wasting capital is no longer necessary or defensible.
The TOP tools, techniques and processes "solve" the Capital Crime.