Written by: Melissa Neal

Project selection is a critical process in project management for companies that have large capital expenditures, spending millions to billions of dollars on new and existing assets every year. Despite this, little focus has been placed on improving how they handle the core steps involved – evaluating, prioritizing, and selecting the most optimal capital projects and filtering out the poorest ranked projects.

What is Project Selection?

Project selection is the process of identifying, evaluating, and prioritizing potential projects within an organization or a portfolio. Capital project selection involves assessing various project intake forms and project proposals to determine which idea aligns best with an organization’s strategic goals, resources, and constraints.

Effective project selection is critical for organizations to allocate their resources efficiently, minimize risks, and maximize the likelihood of achieving their strategic objectives. It requires a systematic and objective approach that considers various factors to ensure that the selected projects align with the organization’s overall vision and priorities. Strategies to improve project selection include implementing idea management and demand management frameworks or systems.

The Impact of Manual Processes in Project Selection

Capital budgeting and project selection in particular, is often a lonely orphan, disconnected from IT-driven business process improvement initiatives and left to cope year after year with time-consuming manual processes and weak decision-making tools. This leads to “the danger zone” – bad decisions costing large amounts of money.

Mistakes in Project Selection

What mistakes are organizations typically making in project selection? Let’s begin this discussion by starting at the top. An organization’s strategic objectives should drive every project proposal. Although, most companies don’t have a structured way to enforce a review and justification for strategic alignment before projects get approved.

Even when a project shows a profitable return, it might not align to corporate strategy and therefore is still ultimately a waste of time and money. Therefore, that capital project should not be selected, but how do you ensure that?

Related to organizational strategy, it is even more important to invest in innovation and market-leading idea and demand management technologies to maintain and improve competitiveness. Nonetheless, these projects may lose money initially, or even for years. How does an organization ensure that these important projects critical to future business success get the weighting they deserve, in spite of their near-term financials? Does your organization have a category and a fair project selection system for CapEx investments?

5 Common Challenges in Capital Project Selection

1. Strategic Alignment

Failure to align capital projects with the organization’s strategic objectives can lead to investments that do not contribute to the long-term goals of the business. It’s crucial to ensure that capital projects directly support the strategic priorities and growth initiatives of the organization.

2. Prioritization of Projects

Inadequate prioritization of capital projects can result in misallocation of resources and delays in achieving critical business objectives. Organizations should prioritize capital projects based on their potential impact on revenue generation, cost savings, or operational efficiency.

3. Stakeholder Collaboration

Not involving key stakeholders, such as senior management, finance teams, and operational leaders, in the capital project selection process can lead to investments that do not meet their needs or expectations. It’s essential to engage stakeholders throughout the project selection process to gather input, ensure alignment, and secure buy-in.

4. Assessing Risk Factors

Neglecting to assess and address potential risks associated with capital projects can lead to cost overruns, schedule delays, and project failures. Organizations should conduct thorough risk assessments and develop robust mitigation strategies to manage uncertainties effectively.

5. Assessing Resource Constraints

Selecting capital projects without considering resource constraints, such as budget limitations, funding availability, and workforce capacity, can lead to overcommitment and financial strain. It’s critical to evaluate resource requirements and constraints carefully before finalizing capital project selections.

The Importance of a Single Source of Truth

Moving deeper into the capital budgeting process, evaluating and ranking project requests correctly is vital to making the right decisions. Although for many organizations, the process is cumbersome, the justifications skimpy and the outcomes questionable.

Generic collaboration and analytical tools like SharePoint, Excel, and email make managing your CapEx process challenging. Often resulting in “spread-mess,” with documents and communications scattered everywhere. CapEx managers waste days to weeks simply trying to find, consolidate and control the documents and approvals. Wouldn’t that time be better spent on actually analyzing project opportunities?

Excel is a great tool for calculating straightforward numbers such as NPV, IRR, and PP. However, as much as we all love it, Excel is not the best solution for multi-dimensional, highly complex processes such as managing business case creation, handling approval workflows, project portfolio management, tracking ESG benefits and enforcing organizational strategy.

Transparency is often a pain-point as a result of handling complex decisions in a unstructured and inconsistent way. The following questions may arise as a result of poor transparency in an organizations project selection method:

1. Where did the project ranking come from?
2. Why did this capital project rank low or high?
3. What were the trade-offs between project A and project B?

Can your organization answer these questions, every time, with confidence?

Mastering Project Scoring Models

Is your organization facing challenges in achieving a reliable and consistent project scoring model across departments? If so, you’re not alone. Many organizations grapple with this issue, leading to potential project decisions that may not be optimal.

Once a project is selected, it’s crucial to monitor its outcomes diligently. This includes assessing its actual impact compared to initial projections. By tracking these results, you can identify successful projects, learn from any discrepancies, and optimize future decision-making processes.

Project Selection Key Considerations

• How can you improve your project selection method next time?
• Did each project portfolio selection achieve the targeted ROIC?
• How many capital projects fell short of targets, and why?
• How can we avoid making the mistakes we made, and improve our performance next time?

Being able to capture and apply “lessons learned” can lead to real improvement in the next capital budgeting cycle. Can your organization do this now, with your current capital budgeting process?

A compelling reason to improve the capital project selection process is a higher-level benefit: the ability to manage future growth. Companies in growth-mode, for example, making long term acquisitions or investing in new business lines, need to be able to handle their increasing capital investment with control and efficiency. If the selection process can’t scale to manage growth, it will be harder to use selection criteria to pick the right project. This results in poor project planning, weak financial planning and analysis, and misaligned project execution.

Project Selection is Key to Optimizing ROIC

Shareholders strongly value annual Return on Invested Capital (ROIC). Your project selection process is key to improving that cash flow. Gaining better project control, efficiency and visibility will ensure your organization is choosing the winning project proposals.

By adopting streamlined organizational practices, you can transition your CapEx process from a state of disarray, commonly referred to as a “Spread-Mess,” into a well-organized and efficient system. This transformation not only minimizes confusion and inefficiencies but also enhances productivity and enables better decision-making in managing capital expenditure projects.

Check out our blogs and articles below to gain greater control of your demand management process for effective project selection.