The recent Summer Olympic Games in Paris were a nail-biting reminder that profound outcomes can be decided by the slimmest of margins. In the men’s 100m dash, mere thousandths of a second were the difference between victory and defeat.
Those that reach the Olympic level have a clear understanding of their performance relative to both their prior selves and their competition. Whether they’re looking to beat a personal best or shatter a world record, athletes — both individually and as a team — measure their progress via benchmarks.
The business world is no different. Benchmarks set the bar for success, whether it’s exceeding last year’s numbers or outperforming the competition. From the C-suite to individual teams, leaders keep a close eye on their performance and how they measure up against their rivals.
For those tasked with maximizing capital investment performance, and have the benefit of comprehensive project-level data, there are gold medals to be won with benchmarking in the form of growth, revenue and, of course, compensation. Which is why it pays to have every advantage you can get when it comes to understanding and applying benchmarking as a practice.
Why internal and external benchmarks matter
For Olympians and capital allocators alike, benchmarks are the measuring stick for evaluating performance versus their own track record and competitors. There are merits to looking inward and outward:
Internal benchmarks: The barometer of progress
You can’t improve what you can’t measure – which is why it’s so critical to have the ability to access, compile and analyze performance data within your organization, particularly as it relates to individual projects, projects within a portfolio, and projects across decentralized enterprise structures.
Most important is the ability to compare and contrast projects by type (e.g., maintenance, regulatory, growth), by specific KPIs, by percentage of projects planned vs. in-flight, and dynamic (changing) in-year status and long-term status. Additionally, to compare and contrast projects that have similar characteristics which were completed in the past, thus providing a benchmark of their own, vs. what is being proposed now.
Problem for a majority of companies is that they don’t have this data in a usable format or access. Spreadsheets and generic workflow systems doesn’t enable this data, nor does it provide context or insights (thus “dumb” fields). It’s why, if you want to leverage benchmarking to get a better sense of where to invest, you need an “intelligent” system that includes in-depth project-level data.
External benchmarks: How you stack up against the competition
While internal benchmarks are essential for measuring progress, knowing where you stand relative to your peers is valuable as well. Unfortunately, unlike in sports, where stats are readily available, finding high-quality, relevant external benchmarks for Capex can be a challenge. Public company filings often lack the granularity needed for meaningful comparisons, and internal processes and strategic alignment are rarely transparent.
Industry reports and other sources that provide up-to-date, comprehensive performance data for others in your field can be a good start. The more good data at your disposal, the more useful your benchmarks will be.
Key Capex benchmarks
Here are some impactful benchmarks that will give you a good sense of your Capex effectiveness.
Median days to project approval
It’s not rocket science: generally speaking, the less time it takes projects to make their way through the approvals process, the better. Long approval processes open the door to escalating costs and missed opportunities.
The impact of these delays goes beyond just frustration. They can also drive up costs and hinder your ability to respond to market changes.
Return on invested capital (ROIC)
For CFOs, just about every priority pales in comparison to maximizing ROIC. Calculated by dividing after-tax operating profit by invested capital, it’s the ultimate litmus test for effective capital allocation. In essence, the higher your ROIC, the more value you’re creating for shareholders, and the more attractive your company becomes to investors.
With CFO tenures getting shorter and shorter, delivering strong ROIC performance right out of the gate is an imperative. As Tom Scalera, former CFO of ITT Corp shared with us, immediately demonstrating an ability to generate strong ROIC will build credibility with investors and the board, buying time and trust needed to execute a long-term vision.
Share of projects that go over budget
Every organization has projects that run over budget, and in many cases, it’s out of their control — supply chain disruptions, labor shortages, and inflation can all throw a wrench in the works. A study in the International Journal of Innovation, Management and Technology found that “nine out of ten [construction] projects…experienced cost overrun.”
The difference between top performers and laggards is that the former minimizes “preventable” overspending, usually due to poor project evaluation, inaccurate forecasting, and a lack of post-completion reviews.
Average overspend percentage
Knowing the extent to which projects exceed their budgets is just as crucial as knowing how many do. Nailing a project forecast to the dollar is unrealistic, but a high overrun percentage is a red flag indicating a need for tighter cost control and more accurate forecasting.
McKinsey estimates the average cost overrun of projects to be $1.21 billion. At that level, even a modest reduction in overspend percentage can have a meaningful impact on the bottom line.
ROI variance
Budget variances are a constant focus for finance teams. The monthly review, where departments justify overspending or underspending and outline corrective actions, is a familiar ritual in most organizations.
By comparison, ROI variance — the average difference between actual and approved project ROI — tends to get short shrift. And that’s a problem. Capex is the engine of growth for most companies, and a detailed understanding of how actual returns diverge from estimated returns is critical for keeping that engine humming.
A high ROI variance signals a disconnect between your initial projections and actual project outcomes, which could be due to flaws in your forecasting models, inadequate risk assessment, or poor project execution.
Benchmarking your ROI variance against industry standards can be a wake-up call, prompting crucial questions like:
- Are you consistently projecting ROI and using it to guide allocation decisions?
- Are you rigorously evaluating ROI at every stage of the project lifecycle?
- Are you leveraging post-completion reviews to learn from past projects and improve future forecasts?
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