IF you have missed part one, click the button below to read from the beginning.
The story about Robert and his colleagues continues. Follow them in their endeavor to improve long-term cash flow by fundamentally changing the way their 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)
Robert, who chaired the Capex Committee, looked at his wristwatch. “So, are we in agreement?” he asked the rest of the group. It was more of a rhetorical question than a real one. He knew they were all aligned. And it had been almost friction free. They would all get home in time for dinner. He was not sure everyone appreciated that, though. The thought made him smile wryly.
Only last year he had dreaded these meetings. Someone had jokingly called it B.C.T. – Before the Capex Tool. Even though the requests were supposed to use the same models and templates, they had often been “tweaked” or sometimes even manipulated. They had changed hands many times and the end result was something akin to a game of “Whisper.” What ended up at the capex committee was often unrecognizable to the original author and no one could understand the, at best, manually kept change log. Therefore, it was also difficult, with certainty, to say who changed what and when. And that had been the easy part to handle. The real challenge had been agreeing on the capexes to commit to and which ones to deny or potentially postpone. Robert had previously, B.C.T., always left the Capex Committee meetings with a feeling of being out of control, of being forced to accept capexes in sites and machinery on which he really, really did not want to spend any money. However, the requests always looked so good. He knew the site was using outdated equipment and that the numbers showed a very short payback and a very good NPV. On top of that, the sites’ ROCE was way above the company average and target. How could he say no? In fact, before this year he could not. So, the money went to wherever the shortest paybacks were found. It just so happened that they were seldom found in the sites and machinery that were state of the art. Too little of the money had ended up being spent on the sites that they would still operate in ten, fifteen years. On that, Robert would bet his right arm!
Now, the model, templates, strategic rational, classification, users, change logs, approval routing, the process, you name it, were all standardized and transparent. Very important in itself, but Robert suspected that many modern Capex Management Tools could help out with that. What set their chosen solution apart was how it interconnected with the long-term Asset Strategy that they had established. How ranking based on payback took the second seat compared to how that particular capex interplayed with the Asset Strategy-was it aligned? What did the Asset Strategy say about the long-term survivability of the asset? What was to be expected over the next five, ten, or even fifteen years when it came to reinvestment, investment, or compliance needs?
The Capex Committee was looking at a “dashboard” summarizing the coming year’s capital budget; a budget that Robert and Mary, the CEO, would present to the Board of Directors at the upcoming meeting. Once a year, every fall, the board reviewed the three-year investment plan and (usually) approved next year’s capital budget. Sonia, a senior controller, raised her hand as if she was still in school. “Yes, Sonia?” Robert said.
“I think that we are all aligned, but will the board be?” Sonia asked and continued, “The total limits we ask for are not that different from what we have used historically, but the allocation…it is…how should I say it…a lot more active. Some businesses get a lot, others very little. I believe, no, I am convinced that is right but will the board stomach it?” Sonia looked at the others and the others looked at Robert. Robert had expected a question like this; he was rather surprised it had not come earlier. It was very true what Sonia said, the capital allocation was much more active-between businesses and between sites and machinery-historic capital budgets were no longer any argument for getting money going forward, neither were egalitarian principles of a certain sum per capacity or sales. Egalitarian principles are very noble when it comes to people but not when it comes to machinery – not all machines and businesses are created equal. And it meant that they, as the leaders of this company, had to take responsibility not only for the fun things such as installing new machinery or updating older lines and machines, but also responsibility for active choices of machine, site, or even whole business closures. Not all liked that. Most people never said that they did not like taking responsibility, more often they pointed at someone else that they imagined would not like it such as the CEO, the board, an owner, the union, media… That is why Robert now felt so good about having started at the right end, with the asset strategy and then following it up with the capex plan and budget.
“I would not worry more than normal about the board,” Robert said, “They are already in the know.” He continued, “Both they and the senior leadership of this company is prepared to take some heat regarding a number of the upcoming decisions, but hey, that is our job. If we cannot stomach it, well then maybe we should be doing something else.” Robert felt that his tone may have been unnecessarily harsh, but he meant every word he said. He would be damned if they as a company could not take responsibility for the tough decisions when they all agreed it was the right way to go.
In the car on his way home, Robert was thinking about the meeting. Overall, it had been great both in terms of outcome and in terms of how they had gotten there. However, at the end he realized that they still had one thing to do regarding the job he and Mary started last year. The supplier of the systems and services they had used had tried to get his attention regarding this, but Robert really did not think it was necessary – yet the last few minutes of the meeting had made him change his mind. They now had the strategy, the tools, and the processes in place. A lot of people had been through some training and especially the select few that participated in the original Asset Strategy project last year had changed their mindset and learned to better understand how the Asset Strategy and how individual capex decision interlink with long-term cash flow and enterprise value. Now, Robert wanted that understanding to go beyond the select few. Alright, it was not for everyone in the organization, but definitely more than the selected few needed to get that extra training and understanding for him to honestly say that the mindset they strived for was now a part of the company culture.
To be continued.
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You are wasting capexes – but you don’t have to…