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Three Common Hurdles to Implementing Capex Automation and How to Overcome Them
The concept of digital transformation of finance has become such a hot-button issue. With so many varying takes on the topic, it’s no surprise that many organizations struggle with building their roadmap. This can be particularly true when it comes to Capex automation.
Conventional wisdom suggests that Capex automation is a “no-brainer” given the role that it plays in a successful enterprise, and the amount of money that is at stake. That is, until pesky details start to get in the way and the inclination to do nothing starts playing devil’s advocate.
Against this backdrop, here are three of the bigger hurdles you might face specific to transforming your Capex processes, and how to overcome them.
Who is the champion?
In most large enterprises, significant change doesn’t occur without the support of executive leadership. In its absence, the mountain to climb is much steeper and more perilous. Getting that support isn’t always easy.
Which is why you need a “change agent” to champion the cause … someone who understands that great ideas need to be sold and, as Thomas Edison put it, recognizes that “vision without execution is hallucination.”
Your change agent should be someone with technical and soft skills. A person who is particularly good at articulating the “Why?” … and can then translate the emotional argument into a strategy that builds empathy, rapport, and ultimately amplifies the business case.
To do this, change agents use their informal networks to communicate, build consensus and harness a team that can do the work. Patient, well prepared, and armed with facts, they are able to find momentum. And, ultimately, they are able to overcome those who rationalize that it’s easier to stay with the status quo (because it’s “good enough”) rather than do the right thing.
The Bottom-Up Paradox
Another common hurdle revolves around how Capex automation increases accuracy, transparency, and compliance. Put simply, it compels project owners to follow a prescriptive course — and that can be construed as “disruptive.” (Translation: accountability.)
Planning, budgeting and forecasting a large capital project is inherently a “bottom-up” exercise — which follows a zero-based budgeting (ZBB) mindset. In a purpose-built Capex system like Finario, the process is logical, intuitive, and automated.
In contrast, “top-down” budgeting, with its reliance on historical spend adjusted by an arbitrary percentage, requires significant effort to collect budgeting and forecasting data. In a way, this creates a “tolerance” for less detail and accuracy. Which, in turn, places less onus on project owners to be accountable for their results.
So how do you overcome resistance to change?
You wouldn’t spend tens of millions of dollars on a process to increase gross margin without actually tracking your gross margin change. You wouldn’t institute policies to control SG&A spend without tracking SG&A as a percent of revenue. So why would you spend tens of millions on capital, which will impact the profitability of your operations for years, without fully vetting projects and carefully comparing them to one another?
Making that argument as governance vs. guidance is one place to start. The next is to offer a counter argument: that implementing an enterprise capital planning system like Finario will significantly simplify the process for all users, provide greater flexibility, and at the end of the day, make those who use it look better for producing projects that more consistently result in an attractive ROI.
“Our ERP Can Do That”
Yet another hurdle is the argument that existing project accounting within the ERP system in place (or perhaps with a little tweaking) is sufficient to manage capital project management. With all due respect to those who espouse this, it’s more like going into battle with a butter knife than a bazooka.
ERP systems are simply not designed to accommodate the demands and nuances of the capital process from start to finish. While they might capture actuals and forecasts at a project level, they offer little or nothing for the budgeting and approval process. Generic project accounting also lacks the ability to identify individual assets on complex projects and fails to capture depreciation details needed to transfer the project to fixed assets not to mention having nothing to say about ROI.
Exposing these weaknesses is key. For example: Annual budgeting will likely be offline since you don’t want unapproved projects created in your ERP. So now you have to roll up a bunch of spreadsheets that likely are in different formats and lack the supporting documentation you need to compare all the submissions against one another. This opens you up to possible version control issues, update bottlenecks, and does not allow real time viewing by leadership.
For the approval process you will either have to dedicate a resource to track emails nonstop or automate the process in something like Sharepoint. Neither approach is very good. Emails invite human error and confusion while a SharePoint or similar solution is difficult to update over time, incapable of handling complex approval streams, and will require support from IT and the constant wrangling of “workarounds”.
Translating these shortcomings into costs, cost-overruns, and missed opportunities will make the case. After all, money talks. Which leads us to our final point …
The Elephant in the Room
Even after the typical hurdles we’ve discussed have been overcome, someone is still likely to bring up the issue of how much a Capex software solution costs. Which is unfortunate; a better discussion is “price/value.”
Here, again, it’s important to shift the discussion to the potential ROI. According to McKinsey & Company, for instance, achieving world-class Capex management can drive a 15-25% reduction in overall capital spend coupled with an improvement of 2-4% in return on invested capital (ROIC). “Some firms have even achieved a staggering 50% reduction in year-on-year Capex portfolio spending,” the company says.
It’s hard to argue with that! Instead of figuring out how to vault hurdles, you should be jumping for joy.
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An Engineer’s Guide to Capex Automation
You’ve thought through every detail and have full confidence that the solution you’re proposing is right for the business challenge or need at hand. But it doesn’t get approved for funding.
What happened?
The answer can be complex. But it starts with the recognition that engineering projects and financial decisions are inexorably tied together. So while you may have made the right engineering choices, you just may have missed the mark on defending your business case.
Or, the real problem may very well be that your company has a flawed process in how it evaluates Capex projects to begin with.
That’s why making the case for an integrated capital investment management solution, including Capex approval, may be the best project you take on next
Recognizing that you are “competing” against other projects for funding, you have an obligation to make a clear and compelling case for what you are proposing. After all, capital is finite and there may be more project proposals than cash to pay for them.
This doesn’t mean you need a doctorate in business to present your solution effectively. Or that the processes in place, which do not promote “apples-to-apples” consideration, can’t be improved. So, let’s look at each of these.
Making the case
It’s a fact of life: good ideas get quashed and mediocre ones get approved. Among the reasons: manual processes don’t facilitate consistent and clear communication of the business case, and it makes it difficult to compare one proposal to another.
Moreover, if you’re submitting 10, 50 or 100 proposals every year, you know that each one of them takes time. A lot of it. Even if you want to be thorough, provide ample explanation, and do all the requisite math, it can be challenging just to keep up.
Start working within an automated, end-to-end Capex management solution like Finario, however, and all that changes:
- Creates a level playing field by standardizing the details (with templates) that are required before submitting a project proposal for approval.
- Makes it easy to pull in data and narratives from comparable projects, which also lends added credibility to key assumptions.
- Allows you to attach documents that help to substantiate your recommendation, and “travel” with the project proposal as it is viewed by others.
A repeatable framework also includes financial models. Make sure you put the same effort and thoroughness into the financials as you did the technical and business aspects of the project. This does *not* mean creating an overly optimistic scenario, just be honest. If you have questions, reach out to your local finance team or the corporate owners of the Capex process. Clear, easy to follow financials go a long way to selling a project.
By eliminating many of the barriers to a thoughtful proposal, you can focus on the business need you are going to satisfy, how your project addresses this need, and how the project will be delivered. You can then spend your time focused on what matters next, which is getting your project approved.
Capex approval for engineers
Left to manual processes and antiquated systems, getting a project approved can feel like playing a game of “telephone tag.” As each approver reviews the details, the story can seem to have changed.
Automation changes all that. Leadership creates business rules that dictate how projects must be approved based on project type, dollar amount, ROI projections or a combination of factors. Which means, you don’t have to worry about who to include in reviews and approvals. Also, it’s always easy to see where in the approval process your project stands and who will review it next. If a reviewer asks for more information, once you have added it to the project record in Finario, it’s available to all of the other reviewers, so no more “answering the same question twice, or three times….!”
What you do want to make sure of is that your proposal is clear, concise, and compelling. If the project requires an extremely technical discussion, be sure to have a “plain language” summary. Typically, you’ll also need to highlight cost savings, margin improvements, and strategic value to the business.
Selling it in
By now, you may be asking yourself, “Why don’t we have a capital planning solution like this at our company?”
As with many things, the answer to that is most often simply a matter of awareness and priorities. Your finance team may not be aware that there is a cloud-based solution purpose-built for Capex that will help engineers plan better and can easily be implemented enterprise-wide. It not-only handles Capex approval but also addresses all of their planning, budgeting & forecasting needs on a single platform. You can also help them understand how much value you can create with better information and project decisions and that the return on investing in a better Capex solution may be much higher than other systems projects they may be considering.
The path to implementation, as with your own project proposals, is to create a compelling case for consideration and gain the buy-in of senior leadership in finance, IT and even procurement. Get it done and you’ll be rewarded many times over!
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Two ways to enhance the capital expenditure approval process
Two ways to enhance the capital expenditure approval process
The capital expenditure approval process should serve as the cornerstone of capital investment cost control, but in reality it can be a cumbersome, frustrating component of the capital investment program for many companies. Commonly, the systems in place to manage Capex requests and approvals are decentralized and suffer from a lack of standardization, making it hard to track which projects are being proposed and approved, and from which corners of the business.
Those that wish to enhance their capital expenditure approval process by increasing transparency and enabling better Capex approval decisioning, can do so by implementing these two fundamental practices:
1. Centralize capital investment proposals
For many organizations, Capex requests and approvals are managed manually in a series of spreadsheets that are circulated via email for review and sign-off. While these types of processes may seem to support local Capex approval needs, they’re inherently inefficient and prevent the organization from establishing a clear sense of which projects are in the full capital investment pipeline and how the projects compare to one another.
Centralizing the capital expenditure approval process within a cloud-based application that allows for mobile approvals and customizable approval thresholds across business units helps to ensure that project approval status can be easily monitored by those across all necessary levels of management.
2. Allow for easy capital project prioritization
Getting all of your proposed capital project ideas into a single, centralized application – while important – is only the first step. In order for your capital expenditure approval process to power informed, effective decision making, the application you use must take into account each capital project’s projected return on investment.
After all, without a project’s profitability index (PI), net present value (NPV) or payback calculated, how can you truly be sure a project is worth undertaking?
Beyond merely displaying each capital investment’s projected KPIs, any new Capex application must allow you to easily rank and prioritize proposed capital projects, while taking into account the impact of approving or rejecting the project on the available capital budget. In gaining a deeper understanding of how relatively attractive each project is across your organization, as well as whether or not you have the available funds, you’re then positioned to approve or reject a project in an effective and informed way.
To learn about even more ways to improve your capital expenditure approval process, download our executive briefing, Key Elements of an Effective Capex Approval Process.
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