By Max Clarke
Weak capital planning processes frequently restrict the success of companies in asset-intensive industries such as oil and gas, mining and metals, chemicals and utilities. Just 11% of executives surveyed by the Economist Intelligence Unit say their companies achieve the planned ROI on nearly all (90% to 100%) of their projects. The stakes are especially high in these industries: investments are huge, timelines are long and lifecycles are longer still. Poor decision-making in the planning stage can mean financial losses that are an even greater burden in times of economic stress, when margins are tight.
Prepare for the unexpected: Investment planning in asset-intensive industries, a new study by the Economist Intelligence Unit and sponsored by Oracle, shows that executives recognise their companies' inadequacies with regard to planning: a full 47% of executives surveyed rate their organisations as merely "effective" at planning, prioritising and selecting capital investment opportunities, and just 8% say they are "extremely effective". This is surprising, considering that most companies involve a broad range of functions and look at many different kinds of information when analysing potential investment targets. Effective processes for decision-making are the missing link for identifying risks and delivering bottom-line results on capital projects.
Other findings of the study, which is based on interviews and a global survey of more than 400 senior executives in asset-intensive industries, include:
• Companies are missing an opportunity to improve their capital investment selection process by failing to involve programme managers in the planning stage. Only 17% of survey respondents say that the Programme Management Office is currently involved in planning and prioritising capital investments. What is more, only one in five say it should be. This points to a disconnect between project planning and execution (which is in the hands of project managers), and means companies are not taking advantage of these professionals' expertise and stored knowledge.
• Building flexibility into projects, for example by using a modular approach, can help companies plan better, especially in a volatile environment. Planning for the unexpected is a challenge for all companies, although the extended timelines of investments in asset-intensive industries make the unexpected a certainty for firms in this field. Survey respondents consider predicting the costs, return on investment and risks of capital investments their biggest challenges in planning, prioritising and selecting projects.
• Executives recognise the need to improve their capital planning processes, but are not sure where to start. Unlike most of our research, in which certain key areas for improvement stand out, respondents in the asset-intensive industries have no clear idea of how to make their decision-making more effective. This suggests that they must attack the issue from several angles: involving a broader gamut of people in the due diligence and planning process, allowing more time for due diligence, and creating a more robust oversight process for assessing and adjusting the plan over the lifecycle of the project.
• Improving rates of achieving ROI requires companies to balance long-term and short-term strategies. Mature decision-making requires companies to maximise the use of their resources. This means balancing long-term strategies with current cash-flow and financial analysis, so that individual projects fit into the organisation's broader business goals.