Can the Capital Planning Process ever be fixed?

Annual planning is one of the most frustrating corporate exercises I go through every year. Hours upon hours are wasted on creating lists, guessing costs and benefits, building complex CBAs, investment stories, and pretty PowerPoint decks. Sometimes teams get a chance to pitch directly to the investment committee, but more often than not, executive leaders look at lists of ideas and numbers and make the call in a leadership vacuum. The outcome usually leaves teams confused, wanting more insight into the why of decisions, and frustrated with the outcome. The best processes, in my experience, leave everyone a bit wanting for more but confident in the direction of the investments.

With the onset of agile project execution in both technology and business projects, coupled with the move towards product level investments vs. project investments, there is a new tug and pull in the dynamic of capital planning. Agile processes anchor in the concept of fixed funding, constraining budget and resources with scope as the lever to pull to achieve value. Agile’s approach is to develop a minimum viable product, delivering the best value for the customer in the fastest possible time. The product owner must be disciplined in prioritizing and facilitate a rapid feedback loop from customers to the agile team. Also, funding an Agile approach requires framing the bigger picture and developing a broader investment thesis that will govern the investment.

Say you are funding a product that will streamline your customer ordering process. You determine you can drive an additional 5% lift in sales while remaining flat in OpEx cost. You specify a $1M investment is required to achieve this goal, and the increase in revenue offsets the investment at a 3:1 rate. As you move through the Agile execution, you determine that you arguably get enough value on a 2:1 ratio, which is a low hurdle to achieve. Measuring the revenue lift and monitoring OpEx costs throughout the project will help determine when enough value is delivered for the investment to be a success.

A product funding model is similar to Agile, except it is tied to the P&L of the product itself and its total contribution to revenue back to the company. It should be rooted in a robust product-market fit road map that articulates how investments will lead to new features, which leads to better market penetration, client retention, and client satisfaction. Product funding models enable a team to operate similarly to the General Manager of a business. They are required to hit particular performance objectives and in return, negotiate the needed investment required to do so. Many companies look at flat percentages as starting points — 2.5% of gross revenues as an example.

Unfortunately, pitfalls of project-based funding are all too present in the capital allocation process. These projects are anchored to soft benefits such as productivity gains, cost avoidance, risk mitigation, or regulatory compliance. All relevant reasons to do a project, but there is no real way to measure the outcome. Using net promoter score or zero-based budgeting to hold teams accountable to productivity investments are levers that can force project-based funding to produce fruitful results. Companies that don’t anchor to some quantitative measures will wonder why their investments aren’t driving the value they expected. I have yet to work for a company that reviews the cost-benefit analysis presented to acquire the project/product funding and holds the organization accountable for the results. Instead, you often see criticism around execution (late delivery, higher costs, etc.), but rarely has that been tied back to the value that is expected to be realized.

I often have experienced me-based funding advocacy during the capital process. Me-based funding is when a leader only advocates for their own needs without consideration of the broader organization. It is a natural human reaction, but an executive team needs to think about the whole and not the pieces. Shifting from me-based to we-based thinking at all levels of the company will bring forth different investment needs. The best outcome is when marketing gives way to manufacturing or technology investment needs or vice versa during the vetting process of investment opportunities.

If executive teams often stole the playbook they used with their board of directors to manage the capital planning process and allocation of funds, the process and outcomes would be better. A CEO often goes to their board with the total capital budget recommendation required to invest in the business — say 2.5% of gross revenues. They may highlight a few key projects, but the messaging is focused on the outcome.

For example, we will drive shareholder returns through improved client retention, increased market share, and reduced operating costs. These are tied to the financials, so the board can see how the investment flows into the balance sheet. Yet, when CEO turns around and manage this process internally, they tend to micromanage the process, resulting in increased bureaucracy, office politics, and wasted work. Even when a CEO gets it right with their leadership team, General Managers can fall into the same trap as they micromanage their budgets. Don’t get me wrong, inspecting the results you expect is essential, but micromanaging this through the capital planning process doesn’t work.

Regardless of how you approach your capital planning process, here are the tenants I believe are required to create a more inclusive and empowering process:

First, setting a strong investment thesis based on your business sets the stage.
Second, understanding how your allocating money across your investment and where you are putting your dollars is essential.
Third, for each area of investment, there should be quantitative measures on the expected returns.
Fourth, teams need to sign-up for the expected returns, highlighting critical investments to achieve the returns but not having to go to nth-level of detail.
Fifth, there has to be strong trust between the executive team and the organization receiving the funds, putting an emphasis on the outcomes vs. just the inputs.

Since capital planning is often on an annual basis, the process is inherently flawed in that it can’t react to business needs very well. A way to counter this is to have quarterly performance reviews of the capital investment portfolio, setting the stage that investments may start/stop/change based on business needs. All investments are viewed in the whole business context and not just a single capability or business unit.