The corporate capital plan set at the beginning of the year is usually reflective of business objectives and delivered on target, right? Not true. JLL has found that on average, the Forbes Global 1000 companies miss their capital plan targets for office real estate alone by up to 12 percent to plan every year—indicating that many of today’s sophisticated companies are unintentionally inhibiting growth because they do not effectively develop, manage and execute their capital plan. This creates the “capital monster” where money is not well-spent.
Capital planning is an integral part of the strategic planning process. It provides a long-range plan for the capital asset portfolio to meet the goals and objectives in annual performance plans. Regardless of the size of your organization, capital planning should be viewed as the vehicle that guides decision making for all capital spend and generation.
Unsurprisingly, many senior executives in companies spend their time crafting business strategies which are aligned to their corporate capital plan. Whatever it is—be it adopting the latest technology, establishing operations in new markets, or setting up offices to support corporate expansion—capital investment is a crucial enabler of growth.
The disconnect between plan and strategy
We all know that exceeding a capital plan is harmful to our organization in many ways: it can cause financial stress on the organization, reputational risks, and even damage shareholder trust.
On the flipside, perhaps we think that underspending is probably okay… Except that it isn’t. Our report, Tame the capital monster, tells us that many companies tend to underspend on their capital plans. Rather than being deserving of a big company-wide pat on the back, underspending the annual capital allocation means that funds are diverted from more productive uses.
This makes a difference in an increasingly competitive environment where every investment dollar is critical. Without a complete and structured approach to capital planning, organizations cannot evaluate allocation decisions objectively to determine the tasks that will generate the most benefit for the organization.
Peter Trollope, Director of Project and Development Services, Asia Pacific at JLL, notes that “Many companies aren’t monitoring their capital expenditure plan as closely as they should, leading to wasted capital and lower return on investments (ROI). We are increasingly seeing a disconnect between a capital plan and a company’s corporate strategy.”
Three reasons why capital plans go south
So why do companies frequently fail at capital planning? The reasons are related to both the plan and its execution.
Plans are built with unreliable or insufficient data, providing insufficient basis for decision making, forecasting and prioritization. This often arises from a situation where there is organizational misalignment as those who make the plan are not the same people who deliver it.
Limited visibility to progress against the capital plan due to different or incompatible technology tools for monitoring is also an issue. The inability to monitor the plan in real time makes it difficult for teams and stakeholders to ensure that strategic plans are aligned and timelines are met.
There is a lack of flexibility built into the plan—business strategies are often modified midway into a project as circumstances change. The inability to accommodate the reallocation of resources can result in failed capital planning.
Secrets to a best-in-class capital plan
The same report also shares that companies with best practices achieve their capital plan target or only miss it by only up to two percent. How do these companies do it and what do they have in common? Here are some factors enabling them to achieve a high level of precision and allocate the right capital to the right projects at the right time.
A holistic, objective and consistent process: To stick to the plan, companies manage capital planning and project execution as a single or continuous process. They build an accurate and strategic capital plan from the get-go.
Centralized oversight: For a capital plan to work, companies define and empower a single point of contact or a group or a program management office (PMO) to drive governance, communication and a transparent process for executives.
Technology: With today’s advancement in data management and technology platforms, new tools are readily available, which can be leveraged for the foundation of a capital planning program and serve as the mechanism to monitor progress against plan—ensuring transparency and a single information source.
Eliminate overspending or underspending on your corporate capital plans by ensuring that your organization is headed in the right direction. Successfully plan your capital right with these steps:
- Build an accurate and strategic capital plan from the start.
- Establish a function to manage the process holistically from planning to execution.
- Leverage a single technology platform and data set to ensure transparency and a single source of information.
- Ensure that the right skills are in place to drive the plan.
Interested to find out more about Future of Work? Learn more about our outlook on the changing world of work here.