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The C-level Guide to Capex Management

March 17, 2022
2 minute read

With the current COVID-19 crisis, the war in Ukraine, and pressing environmental issues, the global economic situation is in a period of uncertainty that will continue to be felt globally for several years. This period is characterized by increased volatility and faster technology cycles. Consequently, many companies focus on reducing their debt load and cutting costs. However, this is not the best strategy to adopt as it can also impact long-term growth. A better approach to such situations is to continue investing in order to outperform competitors in these moments of truth. Indeed, out-performers, i.e. companies in the top third of stock market valuation relative to their peers, invest approximately 50% more in capex than their peers and achieve approximately 55% higher returns on assets and approximately 65% higher sales growth according to BCG. To guide them in such uncertain times, these companies make decisions based on both past projects and all past decisions. The exploitation of data, seen as the top challenge by companies, allows the latter to take fast and more-educated decisions thus making sure projects deliver their full potential 100% of the time. So the key is not to stop investing but rather to invest better.

Our study with over 200 employees from 50 top industrial firms around the world reveal several key value creation levers that can be used. Based on their feedback, companies that implement these best practices could increase their ROIC by 2 to 4%, reduce the time of capex delivery by 10 to 20% and make 15 to 20% savings. Here is how:

The first step to take is to define the company’s short-term and long-term strategic objectives. Currently, even the best performers continue to make decisions based on gut feelings. Instead of being an intuitive decision process, strategy should be driven by years of data. These objectives should be quantified and measurable so that you can measure the success of your investments and know when you have achieved your goals. Then you should make sure to communicate these objectives with all employees. Understanding the importance of their work and how it contributes to the company’s future will motivate your team. 

Second, companies should set the right budget amount they should spend this coming year. Then, they should compare investments regarding three metrics: price, risk and performance. For that purpose, they can use scenario modeling and forecasting tools. Selecting projects that will allow the company to reach its strategic objectives is of great importance. 

Once you have determined the path to reach your company’s objectives, you must constantly review your company’s performance. Based on our study, 64% of organizations say their projects deliver their full benefits only half of the time or even less often. 10% of them do not even track project performance. This leads to two avoidable consequences: only 40% of companies say projects are mostly or always completed on time, and 46% of them are mostly or always completed on budget. There is thus a major loss of value creation. To avoid falling in such a trap and outperform your competitor, you should implement a process to continually track the performance of ongoing projects and make the required adjustments when necessary. Every time you spot a deviation or a potential future deviation in the performance of a project, you can take steps to solve issues or mitigate risks weighing on the project. 

After closing a project, key learnings should be stored and reused for future projects. This will allow your company to respond to issues and change faster and with more confidence.

To successfully implement such processes, it is vital to make the exploitation of data the top priority. But how can you do that?

The vast majority of data is created within factories. It already exists in your company and is captured. The main problem is the way data is currently captured. Data is siloed and does not support updates well. Some use MS Project, others use Excels or other tools. They each have a different file or a different version of that file. In other words, no one bases their decisions on the same set of information. The lack of standardization in the way to capture this data makes it even harder for all employees to understand and compare this data at their fingertips. 

Not capturing data well (or at all) is a tremendous loss of value in the end. This is why implementing a single source of truth in your organization is so important. Through collaboration and standardization, it allows you to have up-to-date and accurate information at all times.

Vertical has been developed to respond to all these challenges, and big manufacturing firms trust us.

The Vertical Team is available 24/7 to help and support you in creating a seamless and efficient process for managing your capex investments. 

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