At Weissenrieder & Co. we have met many CEOs and CFOs from many different industries that have come to the conclusion that the way they spend and allocate capexes is far from optimal. They know that a substantial part of the capexes spent go to the wrong projects, the wrong sites, and the wrong businesses, and they want to act. They feel the need for change, but they don’t know what to do about it. Where can they find the theoretical insights and the tools that they need? How will the company need to change? And how much is it worth to solve the problem?

Follow Robert on his endeavor to improve long-term cash flow by fundamentally changing the way his company prioritizes when spending capexes. (The Characters in this fable are fictitious; any resemblance to real people or facts within the Corporation is pure coincidence only)

The Capex Process – The tail wags the dog 

Robert, group CFO, left the capex committee meeting with a sinking feeling of being responsible for something, but not in control of it. Every three months the committee that he chairs reviews a current list of capex requests. Except for the board of directors, the capex committee is the final yea or nay when it comes to capexes. This is the group that is responsible for, arguably, the most fundamental task of any listed company – allocating capital. Ultimately, the capex committee impacts the allocation between dividends and investments, between organic growth and acquisitions, between different businesses and different sites, but what they actually do is prioritize between different discrete capexes.

In theory, the process is rigorous. It includes approval routes, tollgates, standardized templates, company-wide macro assumptions, and a set of industry standard decision criteria that is used to evaluate and rank requests. Still, Robert left every single one of these committee meetings with a feeling of being out of control, almost manipulated by the process. Or, he felt forced by circumstances to react to needs rather than act out a grand plan, a strategy.

Most of the meeting he’d just attended had concerned one single site that was in dire straits and faced a number of capexes to comply with environmental standards. Standards that the company had to follow to avoid production limitations but also a standard that they wanted to follow, not the least because more and more customers demanded it (without wanting to pay anything extra, of course). It was a site with a healthy ROCE, but mediocre margins. The capexes’ NPV were there and the paybacks were short (compared to losing volumes or price). However, it was a mill that popped up regularly on the “need” list when it came to capexes and even though ROCE looked healthy, Robert could not remember when the site in question had contributed any significant level of cash flow. But – again – the need was there, the assumptions in the request looked realistic – positive NPV and a 12 month payback.

How could he say no? Why should he say no? Could he say no? Based on what? To the great irritation of a number of people, Robert had procrastinated on making a decision. He felt trapped by the process because he felt intuitively, and by experience, that something was wrong. He thought that the process was too myopic, too near-sighted, when what they really needed was a bird’s-eye view.

A certain text had continuously popped up in Robert’s LinkedIn feed, as contacts of his had “shared” or “liked” it: The Capex Process – The tail wags the dog.” Well, he had two hours to kill on a flight this afternoon; maybe he’d finally read the articles.

To be continued.

Interested in reading the next episode?