Written by: Richard Frykberg

As a sponsor of capital projects, you’re required to make important prioritization decisions about which investment ideas to progress through the demand management process. We never have sufficient time, money, and resource capacity to pursue every opportunity.

The wish list of items for inclusion in next year’s capital budget is costly and long. It contains essential ‘needs’ to sustain current operations and important ‘wants’ to improve current processes, products, or market penetration. Your process for collecting, evaluating, and prioritizing candidate capital projects is crucial to optimizing your investment decisions.

Within many organizations the links between idea management software, capital budgeting, expenditure approval, and project monitoring are fractured. Strategic project portfolio management disciplines are often not implemented. Different demand planning processes and technologies are applied, requiring inefficient manual integration and reconciliation.

By contrast, digital transformation of your strategic demand management process will help you mitigate operational risks, seize opportunities, and achieve strategic objectives sooner. The key components of an effective idea and strategic demand management system are discussed below.

Risk-based Demand Management

The most imperative source of demand for capital funding is for sustenance of current operations. Most of your team members are highly invested and motivated in business operations. They are best placed to identify actual or imminent issues with your current infrastructure through the use of digital project intake forms.

Your business may be built on tangible infrastructure such as buildings, plant, equipment, and vehicles. Or your business may be based on intangible assets such as computer systems, patents, and brands. But over time, because of physical, technological, or competitive obsolescence, your asset base will need to be maintained and ultimately replaced.

Your risk management process should be continuously monitoring this obsolescent risk to your capital base. The likelihood and impact of failure of critical components should be formally assessed. Where refurbishment or replacement of existing assets can significantly reduce operational risk at a reasonable cost, a capital replacement demand request should be initiated.

The prioritization of capital allocation to asset replacement demand requests should be based on this risk assessment and mitigation cost. Obviously, the replacement of a low-cost component of your critical operating infrastructure, where otherwise imminent failure would be catastrophic, is an easy investment decision. Conversely, routine replacement of capital equipment that could otherwise be maintained at moderate cost for an extended period may not be an optimal investment choice.

Simply basing your capital budget for sustenance on historical investments and accounting rates of depreciation is unlikely to provide the best return on investment of your scarce human and capital resources. A more effective sustenance capital budgeting process involves timely collection of capital replacement demand based on a standardized risk assessment. This demand can then be prioritized more effectively to produce a zero-based budget proposal that is easily justified.

Innovation and Growth Demand Management

In addition to replacement of the existing operational capacity, your wish list of capital project initiatives is likely to include savings, growth, and transformational proposals.

These initiatives are likely to produce financial returns and are assessed on Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.

Savings initiatives

Savings-related projects identify more efficient ways of delivering your current scope of products and services more cost effectively and at lower risk.

Examples of such initiatives may include application of newer technologies, alternative sourcing, or refined processing methods.

Implementing these initiatives will incur an up-front investment of time and money but deliver on-going productivity savings to increase organizational competitiveness. Failure to adopt these proposals will leave the organization operating dated infrastructure at an unnecessarily high-cost base, exposing the organization to competitive disadvantage.

Growth initiatives

Growth capital investments identify new geographies or target markets into which the organization could scale its current scope of products and services.

Examples include adding retail stores, expanding delivery capacity, or acquiring competitors.

Failure to grow and achieve economies of scale will render an organization exposed to larger, more efficient competitors.

Transformational Investment Initiatives

Strategic transformation projects propose investments in new goods and services.

In a global market, all organizations must continually evaluate the competitive landscape. They must identify products of greatest demand and technological improvements and adjust their business operations accordingly.

Organizations that fail to adapt to the times are likely to stagnate, as new entrants emerge to satisfy evolving market demand.

Environmental Social and Governance (ESG) Strategic Demand Management

All organizations are in the public eye and must meet community, governmental, and other stakeholder expectations. Many organizations have recognized the value and urgency of addressing the United Nations Developmental Goals including community service, environmental action, and social equality.

Evaluation of ESG investment initiatives requires a different set of evaluation criteria. Whereas sustenance initiatives may be mainly risk based, and growth initiatives financially motivated, ESG initiatives may consider alternative metrics including quantitative measures, such as tons of greenhouse gas abatement, and qualitative measures, such as degree of alignment to ESG objectives.

Environment and Sustainability

Climate action and sustainability has become a primary concern for many consumers. Consumers expect organizations to continuously re-evaluate the way they operate to mitigate their impact on the environment.

For example, many organizations have set specific goals in relation to greenhouse gas emissions and are seeking to achieve a net-zero carbon footprint. These initiatives, which frequently involve electrification and adoption of renewable energy sources, are likely included in your list of capital demand projects.

Beyond good intentions, capital resources must be allocated to the execution of these initiatives to avoid a community perception of ‘greenwashing.’

Diversity Equity and Inclusion (DEI)

In addition to climate action, funding requests may be related to achievement of DEI objectives. For example, adaptations may be made to facilities to better accommodate diverse genders and abilities.

Potential employees and customers are attuned to an organization’s genuine commitment to fund these initiatives, and failure to make measurable progress can have a long-term impact on an organization’s goodwill and ability to recruit top talent.

Compliance

Included in the list of project demands may be investments to adhere to health and safety, quality, waste management, and other regulatory requirements. Failure to include these initiatives in the capital budget could incur significant corporate or personal executive liability.

It is essential that mandatory compliance initiatives are identified, flagged, and prioritized for inclusion.

Completeness of Demand Collection

Effectiveness of the output of the strategic demand management process is entirely dependent on the quality of the proposals submitted. Garbage in will always lead to garbage out.

So how can you ensure that all your mandatory compliance, essential asset replacement, and innovative growth and saving investment requirements are identified and considered?

Digital transformation of your strategic demand management process normally requires an update to the initiative ingestion process. In many organizations this is largely an informal process supported by email, workshops, or spreadsheets. However, not all identification of opportunities occurs on-schedule. Critical items may just miss the capital budgeting cycle with catastrophic consequences.

Accessibility

Opportunities and potential problems can be identified by anyone in the organization. Therefore, it’s imperative that your demand management system is accessible to all and shouldn’t be constrained by access limitations.

This means that your strategic demand management system should not impose a cost or fee for access or be limited to users of any back-end application. It should be available on any device, including any desktop, laptop, phone, or on-site kiosk. It should be accessible in the office, on the factory floor, in-transit, or even at home in the middle of the night when inspiration flashes.

Availability

Your demand management system should allow for submissions to be made at any time of day, on any day of the year. Rather than desperately hoovering-up budget submission in the months preceding the next financial year, capital project demand should be continuously accumulated, evaluated, and prioritized.

Usability

Many initiators in the strategic demand management process may be infrequent users of the system. To encourage the submission of capital demand requests, the system should be intuitive and efficient to use. The amount of data required to be entered should be limited to the bare minimum, and appropriate for the nature of the request.

For example, it should not be required to calculate financial metrics for a safety-related compliance initiative. A high-value transformational initiative will require more substance than the urgent need to replace a relatively low cost, but critical piece of equipment.

Localization

Global organizations require a fully internationalized solution. End-users are familiar with local currency values, date formats and languages. No matter where they are, your strategic demand management strategy should be familiar and intuitive for everyone to use.

Strategic Demand Management and Alignment

When you evaluate and prioritize your project demand requests to construct your capital project portfolio, your most important consideration should be how the candidates capital projects align with your strategic imperatives.

When executive management sets the organizational strategy, it will identify certain Key Result Areas (KRA’s). These KRA’s identify the critical things the organization must focus on to achieve its strategic objectives. Within larger organizations, these KRA’s are cascaded down through individual business units, regions, and departments. They may ultimately be expressed in Objectives and Key Results (OKR’s) that teams and individuals are targeted to achieve.

A key measure when you rank candidate initiatives should be the degree to which they positively impact these most important items. This is further complicated by the fact that sometimes these strategic goals and objectives may appear to be in opposition.

Strategic goals of reducing unit costs, improving safety, and eliminating emissions, for example, may appear to be contradictory, and certainly some initiatives will favor one at the expense of the others.

For example, introducing alternative equipment that slows down the manufacturing process may indeed improve operator safety but will likely also increase unit costs.

Another initiative, however, that replaces a coal-fired heater with an electric alternative may well have a positive impact on all three key result areas!

Therefore, it is important when evaluating strategic alignment of initiatives to consider the impact on all objectives holistically. By weighing the relative importance of each objective, and the degree of alignment, a standardized alignment score can be calculated. This strategic alignment score will provide a valuable input into project portfolio optimization.

Investment Initiative Evaluation and Scoring

You can make the project selection process more transparent and effective by scoring similar projects objectively and consistently. In addition to strategic alignment, the most important dimensions to consider in capital project scoring are risks and benefits. Risks can be further broken down to risk of inaction (urgency) and risk of implementation.

Scoring Project Benefits

The anticipated benefits vary by capital project types and may include both qualitative and quantitative measures.

• Replacement initiatives are primarily motivated by the risk and impact of component failure and so the benefit assessment when contemplating alternative solutions is likely to be the degree of risk mitigation. However, running costs and quality metrics may also be considered.
• Return initiatives are primarily motivated by financial outcomes and financial metrics will primarily impact the benefit scoring. However, competitive differentiation and organizational change management considerations may also be factored in.

Scoring Project Risks

The risk of inaction dictates urgency. If there is no severe impact of not doing the capital project now, it can perhaps be safely deferred. If inaction would incur significant direct or opportunity costs, the initiative should be considered urgent and prioritized more highly.

Implementation risk is often assessed based on the confidence of delivery. All else being equal, those projects that can be executed more confidently should be prioritized over more high-risk endeavors.

Agility to Re-prioritize Project Selections

Effective demand management and idea management recognizes that circumstances change. Pandemics, wars, and natural disasters occur. Technological upheaval and disruption are inevitable. Any project portfolio selection is only as good as the best knowledge available at the time.

To truly optimize the allocation of time and money requires sufficient flexibility to re-prioritize project selections as assumptions become reality.

Perhaps interest rates went up rather than down? Or competitors responded in surprising ways? Or supply chain bottlenecks caused a delay to the planned implementation schedule?

Idea and demand management software solutions should continuously collect promising submissions and make them available for consideration instantly. Whilst overall capital budgets and resourcing levels may be relatively constrained, the specific project portfolio composition should be kept as dynamic as possible.

Just because an initiative made it into the first version of the budget doesn’t mean it should be executed blindly. Similarly, just because a valuable initiative wasn’t submitted on time for the budget, doesn’t mean that it shouldn’t be done. Your system should maintain maximum agility to enable the demand manager to prioritize the most valuable projects, whilst providing sufficient stability for resource management and financial planning.

Stage Gate Management

An essential feature of the idea and strategic demand management process is to track the state of readiness of investment initiatives as further information is collected and interim approvals obtained.

Typically, additional justifications and supporting details are required as an initiative transitions from an idea to an investment proposal for budgeting, to a fully-fledged business case for formal approval of expenditure.

This stage-gating process is important to prevent excessive time and resource being wasted on initiatives that are unlikely to progress. Providing checklists, filters, and approvals at each stage ensures that only consistently high-quality and complete submissions make it into the active project portfolio.

Collaboration and Approval Workflow

Your idea and strategic demand management should support seamless digital workflow between process participants.

Collaboration

Few significant projects are independently defined. Most require the input of technical, financial or procurement specialists. An effective strategic demand management system should facilitate this collaboration process. An online system is most effective at supporting real-time collaboration amongst key participants.

Technical Endorsement

More important to approvers than the detailed content of an initiative, is the insight of specialists. Showing specialist technical endorsement gives executives confidence when making investment decisions. Your demand management system should support efficient and flexible workflow to the individuals whose endorsement would be most valued by the ultimate approvers.

Delegation of Authority Approval

Ultimately, project approval will be based on the organization’s delegation of authority policy. Larger, more risky projects will naturally require a higher level of executive approval. The system should provide decision makers with consistently presented information, reliable scoring metrics, and access to supporting documents and commentary to make good, timely, and confident decisions.

Impact Assessment and Analytics

Many legacy ideas and demand management systems rely on discrete document exchange. To produce effective analytics from these independent documents requires extensive manual interaction and rekeying. By contrast, digital demand management systems provide a single source of truth for instant, consistent and reliable reporting, and analysis.

Investment Cost and Cash Flow

The primary reporting requirement when assessing a proposed project portfolio is the phasing of related expenditure. Project expenditure is classified as capital expenditure (CapEx) when it results in the production of an asset with a long-term useful life. Operational expenditure (OpEx) is expensed in the period that it is incurred.

From an economic evaluation perspective, one of the key differences is that the tax benefits of capital expenditure are normally deferred. From an accounting perspective, CapEx will have a deferred impact on the operating result in the form of an annual depreciation charge.

Many projects require both Capex and Opex. An effective demand management system will classify expenditure accordingly and effectively demonstrate the accounting, cashflow and economic impacts of the alternative project investments.

Project Portfolio Impact on Operating Performance

Some of the most important data contained within the individual business cases is the expected impact on operational performance. In many legacy environments it is not feasible to directly analyses the combined impact of the capital project portfolio on the future operating result. The financial analyses behind promised savings and revenue generating ideas are inaccessible in multiple spreadsheet documents.

A digitalized demand management system supports the preparation of online business cases.. In addition to modelling investment costs and cash flows, it is now feasible to assess the cumulative impact of the project portfolio on the profit and loss statement and balance sheet. This is a valuable insight for executives who need to report and meet shareholder expectations.

Project Monitoring and Control

Just because an initiative may be approved for project execution doesn’t mean it should be completed at all costs. From an economic perspective, any historical expenditure is merely a sunk cost. At any point in time, continued expenditure on a partially completed project should still be evaluated against expenditure on the next best alternative.

To enable ongoing optimization of the project portfolio it is important to keep track of actual and forecast expenditure on in-progress initiatives, as well as demand forecasts. Especially where expenditure variances are detected, an updated financial analysis should be conducted to validate and justify the continued investment.

Project Completion and Post-Implementation Review

On completion of a project, it is important to conduct a post-implementation review. This helps the organization improve its project evaluation and selection processes. Any adverse findings help future estimation and evaluation.

Enthusiastic sponsors overestimate anticipated benefits and underestimate investments costs and timeframes. The post-implementation review process helps mitigate this risk, when the sponsor knows that actual results will be measured.

An effective demand management solution will facilitate this post-implementation review process and collect insights and metrics that can be applied to more effectively evaluate and control future projects.

Information Security

All users of your demand management system should be properly authenticated, and access restricted on an appropriate basis. Some of the initiatives in your strategic demand management process will contain commercially sensitive information. Adoption of new technologies may impact management teams or identify opportunities of great interest to your competitors.

The valuable intellectual property contained in investment proposal submissions should be well protected. Even if not implemented this year, promising initiatives should be retained and appropriately backed-up to ensure that they are not lost or forgotten.

Unless your information security and data protection protocols are world-class, professional Software as a Service (SaaS) solution providers are likely to provide better protection than your own internal safeguards.

Integration with Supporting Systems

Your idea and strategic demand management system is a critical entry-point to project portfolio management and execution. Strategic demand management is intrinsically connected to your project execution, procurement, resourcing and financial processes and systems. You demand management solution must provide an application interface to trigger and receive updates from these supporting systems.

The Imperative for Strategic Demand Management

Strategic demand management is the process of collecting, evaluating, and prioritizing investment initiative requests. This process seeks to maximize the value contribution of the project portfolio within human and financial resources constraints. Initiatives are monitored throughout their lifecycle to ensure that anticipated outcomes are achieved.

Unfortunately, current demand management processes are often fragmented across various systems, are inefficient, and fail to deliver an optimal project portfolio or return on investment.

You can’t afford not to have a seamless process for managing capital project demand. Your wish list of strategic demand projects includes items that if not actioned may expose your organization to catastrophic impacts. These may relate to both critical sustenance of BAU operations as well as innovations that may end up being actioned by your competitors before being adopted by you. Failure to act upon community, governmental and stakeholder expectations and commitments can lead to irrecoverable loss of goodwill, penalties, and terminations.

Digital transformation of the demand management process will enhance productivity, provide reliable ranking, present a single source of truth for analysis, enable seamless workflow between participants, heighten security, and more effectively control the stage-gated process from demand submission through to successful project completion and benefit realization.