The Seven Challenges of Capital Programming and Overcoming Them

At Alithya, our Higher Education, Healthcare, and Transportation clients often ask for help streamlining their capital request, prioritization, and approval systems.   As capital projects become more expensive with investments in modern facilities and equipment, many teams are looking to optimize their capital investment processes and making sure their high-profile, high-spend, high-impact investments are well managed with good stewardship.

The numbers are LARGE!  Below are some 2017 capital spending statistics according to the US Census:

  • Higher Ed – $36.7B a year
  • Healthcare – $104.9B a year
  • Transportation – $110.1B a year

With capital spend growing, organizations ask for help to revamp capital programming when they see their annual capital portfolio reach a 100+ capital requests per year, culminating in $100M+ of capital spend per year.  When capital programs get to this scale, organizations can no longer effectively manage portfolios merely utilizing Excel and Email.  If your capital program is locked in Excel, it’s too easy for the organization to make the wrong investment or overspend on in-flight projects.

When capital spend hits this level, we see the following recurring themes:

  • An opaque capital investment pipeline
  • Cross-functional teams are not involved early enough in the capital request process
  • Capital requisition process is annual (not real-time)
  • There is little linkage between capital requests and the organization’s capital constraint
  • Capital spending not linked to the organization’s strategic plan
  • Incomplete capital requests and surprise project overruns
  • The process is too manual – utilizing Excel, Word, and Email

Challenge #1:  An Opaque Capital Investment Pipeline

Treasury and Finance have limited visibility into the longer-term needs of departments and business units.  Finance only gets an annual glimpse during the capital request cycle when hundreds of requests surface and need to be quickly prioritized.  It’s hard to really understand, prioritize, and guide in a time-compressed period.

Ideal State: Departments continuously enter their capital needs into a sandbox, so departments can begin thinking strategically and build their own “mini investment roadmaps.”   During the capital cycle, a department can cherry pick select requests and submit them for approval.    If they’ve been working on their capital needs throughout the year, the capital prioritization process will be much smoother.  At the same time, Treasury and Finance can aggregate sandbox information to look for themes, trends, and emerging needs.

Challenge #2:  Cross-Functional Teams Find Out About Proposed Investments Too Late

Without a system helping to drive the capital program process, departments don’t always know who to involve in various capital requests and when to involve them.  Often, support functions like IT, Facilities, or Purchasing get notified to ‘start work’ on a project into which they had no input or visibility.

Alithya has recognized a few real-world examples:

  • A department receives approval to purchase a piece of equipment, but no one realized the Facilities Department needs to build out a room.
  • Two departments are soliciting approval to purchase the same item, but the Purchasing Department finds out too late – missing an opportunity to take advantage of better purchasing terms.

Ideal State:  As capital requests are promoted out of a department’s sandbox, cross-functional teams get visibility to new requests via dashboards that highlight new, relevant requests.  If there is a question about something new on the list, they can raise concerns, or acknowledge that they have seen the request.

Challenge #3:  Capital Request Process is Not Real-Time

Too often, the capital request process runs annually, a capital program with a list of projects gets approved, and the fiscal year starts a few months later.   Often, business units, functions, and VPs are left to self-administer within their capital allotment contingencies.  However, much like the previous two challenges, the rest of the organization is not getting a real-time view of the current capital need.

Ideal State:  An annual request process establishes each function’s routine capital contingency.    A system should administer a standard request workflow for ‘routine requests.’   As the fiscal year progresses, routine investments should be requested and adjudicated, and then communicated to cross-functional teams so they are afforded the opportunity to review items that may impact them.

Challenge #4:  Little Linkage Between Capital Pipeline and Organization’s Funding Capacity

As organizations think about capital improvements several years out, most do not have a formal methodology to look at the various capital structure and funding scenarios that drive their capital capacity.

Ideal State:  Implement a capital funding capacity model to evaluate various scenarios in order to set the capital program budget. The typical scenario modeling includes analyzing options such as adjusting fees, fund raising, issuing debt, or drawing from endowments.   This scenario model will drive the capital budget limits within the annual request process and allow the treasury function to drive its capital raising plan.

Challenge #5:  Capital Spending Not Linked to the Organization’s Strategic Plan

Organizations need to make important decisions around large capital projects that will impact their finances for many years into the future.  However, many organizations do not integrate their capital plan into their strategic plan. This prevents them from forming a holistic understanding of the crucial impact these decisions have on their future financial statements and key metrics.

Ideal State:  It is important to provide a linkage into the strategic plan so that senior management can gain insight into how capital allocation decisions impact future cash flows and requirements for additional debt or bond issuances.  Incorporating debt covenant calculations and credit rating metrics into the strategic plan can provide further understanding into the organization’s future debt and capital capacity.  Integrating scenario analysis into the strategic plan around the inclusion/exclusion of unapproved capital projects and the timing of the cash outlays associated with these projects can help organizations optimize their mix of capital projects given their financial projections and associated constraints.

Challenge #6:  Incomplete Capital Requests and Surprise Budget Overruns

Often, capital spend is not prioritized and managed consistently leading to the wrong projects being approved, projects going overbudget, and not all capital costs for a project being estimated.

Ideal State:   Define a consistent capital request, prioritization, and approval process that can be universally applied to the organization.   Establish rules around how ‘routine capital’ and ‘strategic investments’ should be facilitated by a formal request process, an opportunity to prioritize, and an approval workstream within the organization. Determine when in the prioritization process, cross-functional teams such as IT, Facilities, and Purchasing should receive visibility into a potential investment.

Challenge #7:  The Process is too Manual – All in Excel, Word, and Email

Even the largest organizations are managing the capital request process via Excel, Word, and Email, with Finance building up spreadsheets of requests.  Once the capital program gets prioritized, approved, and project budgets issued, ongoing projects are often managed in Excel with finance managing budget transfers between projects, actuals vs. budget reporting, and placing an asset in service.

Ideal State:   A capital program system should download cash commitments and cash disbursements from the ERP nightly, and at a level comparable to approved project budgets.   If a project is going overbudget, a department should submit a new incremental funding request so the organization can formally decide to continue to fund or terminate the project.  Similarly, as projects near completion, a system should automatically flag projects to close.

Alithya’s Solution

We are focused on helping clients with this key business process and have established Alithya’s Capital Portfolio Planning, a repeatable implementation that shortens the time it takes to address the challenges outlined in this post. By using the flexibility of Oracle’s EPM Planning tool, we can quickly implement a robust capital programming process.

David Pabst - The Seven Challenges of Capital Programming and Overcoming Them - 8-27-19 - Image 1

To learn more about streamlining your capital programming process, please read our solution brief or contact Alithya to request our capital programing assessment.

Contributing to this post are David Pabst, Practice Manager, Capital Planning Product Manager, and Andy Starks, Practice Director, Strategic Modeling Architect

For comments, questions or suggestions for future topics, please reach out to us at infosolutions@alithya.comSubscribe to receive notifications about new posts about Cloud updates and other Oracle Cloud Services such as Planning and Budgeting, Financial Consolidation, Account Reconciliation, and Enterprise Data Management.  Follow Alithya on social media for the latest information about EPM, ERP, and Analytics solutions to meet your business needs.

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Implementing Zero-Based Budgeting: The Requirements

A Culture Change and a Centralized System

The first post in this 3-post series – Implementing Zero-Based Budgeting: Benefits, Myths, and Goals – covers the benefits of zero-based budgeting. To summarize, it enables you to achieve long-term savings that result in sustainable growth and holds your financial analysts accountable for the cost figures they approve and how they are managing the overall budget. This allows more effective recognition of any unwanted costs and how you that money can be shifted into other growth areas within the company.

However, to reap the benefits of a zero-based budgeting program, a culture change is needed first at certain levels within the company. The goal is to eventually have the entire company complete this culture shift, but it is best to start small. Along with a change in culture, a centralized reporting system needs to be created as well to provide teams the ability to share real-time numbers with each other to achieve the goals of this new budgeting program.

Better Than a Quick Fix

What exactly is meant by a culture change? This means starting small and fostering this culture change in other departments starting with Finance. To be successful with this new program, other departments will eventually have to jump on board with this new budgeting approach. These departments will need to step up in analyzing their own costs and how they can save more without diminishing their capabilities.

For example, while financial analysts talk to the shop floor to see where costs can be reduced, the HR department should work with Finance to determine how it can become leaner. Moreover, the IT department should take the lead on negotiating with its vendors to find any areas that can be saved. These are just a few examples of how different departments can step up to the plate; implementing a successful zero-based budgeting program will requires team effort.

Changing the culture doesn’t happen overnight. Senior leaders should take the lead in fostering this change. To ensure that everyone is on the same page, managers need advocate the new approach within their respective departments.

Incentives also help teams to buy into this new budgeting approach.  Although incentives for growth metrics may already exist, additional incentives can effectively encourage staff to find ways to reduce costs for the metrics they manage.

Some examples of incentive metrics are the realized ROI based on the requested capital expenditure and the total cost saving dollars resulting from a zero-based budgeting program. For the former, this can mean moving to the Cloud to save money or reducing redundant tasks by introducing centralized software. For the latter, it can be exemplified by achieving a 10% cost reduction per phone.

Best Practice to Achieve Success

A crucial component of the success of a zero-based budgeting program is an officer who governs the entire process from start to finish. This individual (or team) should contain deep knowledge of the budgeting process. Naturally, s/he will not know the ins and outs of each department, so that is why s/he needs to be an ambassador to department leaders. The officer will also provide oversight to ensure that past bad habits of budgeting do not return to plague this new program. And lastly, s/he must be dedicated to the craft of continuous improvement which means seeking outside counsel when needed.

As mentioned earlier in the post, a culture change needs to be accompanied by a centralized reporting system. Alithya has helped clients implement Oracle Planning and Budgeting Cloud Service (PBCS) and Enterprise Planning and Budgeting Cloud Service (EPBCS) and overcome the deficiencies of Excel-based models. These models lose sight of what the true cost numbers are because past budgets are simple anchors of history rather than detailed breakdowns of cost. Moreover, these numbers become siloed within the vast library of Excel models. With Oracle PBCS or EPBCS, budgets can be highly surgical and help leaders in the company pinpoint reductions.

A centralized system allows the capture of all changes in a single location in real-time, and it provides insight into how effectively managers seek cost savings. This can be used as a key indicator to determine if their actions are in line with this new methodology.

Furthermore, centralization not only holds managers more accountable, but it also empowers them to create innovative cost-saving solutions. Driven by incentives, staff will burn with a clear purpose to find new ways to achieve sustainable growth for the company and be rewarded for hard work.

Recapping What It Takes to Achieve ZBB Success

The goal is to create a cost savings culture that allows more capital to be invested into growing parts of the company. To be successful, follow the best practices outlined, starting with a culture change within the company and giving your teams a centralized PBCS and EPBCS system to more clearly see all data points. The hard work does not stop here, though! The next post delves into setting up a zero-based budgeting system.