OK, I will admit it – I am endlessly fascinated by how organizations select, fund and manage major capital projects; that’s because, at their very core, these big projects embody an organization’s attempt to change, evolve and thrive in response to market conditions. In another age, we would say that this is how the organization is choosing to invest its seed-corn – one of its most precious assets put up against its most important threats/opportunities.
For those who have had the opportunity to watch the process from the inside, most will testify that budgeting/funding process brings out the full-range of human experience including business strategy, short-term financial requirements, and personal goals, objectives and hubris. A project debate which superficially appears to concern a technology or business model choice often has layers of nuance unrelated to the discussion/decision at hand.
In my experience, I have often thought of shepherding major projects within my domain as walking a fine line of communicating up and out to my colleagues on a project while trying to buffer my team from the controversies, flip-flops and requirements changes inherent in most projects requiring more than six-months – shield them long enough so they can actually get something done!
For business and IT leaders attempting to manage portfolios of major projects, 2010 promises to be a bumpy ride. The prognosis is one of slow growth / modest growth in most industries. Investment in new plant and equipment has been significantly scaled back in response and is forecast to rise only moderately. Most people do not realize that in mature economies such as the U.S., IT capital projects comprise 40% to 45% of ALL capital equipment spending. Therefore, as business leaders shift capital spending plans in response to changed economic conditions, IT is often first in line to feel the pinch.
Amidst the moderately optimistic forecasts for 2010 are a number of economic datapoints which suggest that growth forecasts for the back half of the year are at risk. In particular, on Monday, Jan 4, PayNet Inc reported that small and medium-sized U.S. businesses seeking to finance capital equipment showed further signs of distress in November as loans more than six months past due rose for the 22nd consecutive month. Based on my experience in commercial finance, rising 90-day delinquencies suggests significant write-offs are on the menu. I believe that by late April and early May, many companies will conclude 2010 will be a tight year and begin scaling back discretionary spending and non-essential projects. Based on this scenario, consider the following three steps to steel yourself and your organization:
- I recommend re-reviewing the 2010 project portfolio. Assume that mid-year, the funding outlook will turn more conservative. How will a mid-year reduction in the 2010 capital budget affect the various projects? Which ones can be deferred; which ones cannot.
- For the critical projects, ensure there is clear and unambiguous external validation of these projects’ importance. Be able to re-justify to your business colleagues the consequences of deferral – both in terms of strategic impact and operational cost/efficiency.
- Update “Plan B” – the capital budget which assumes lower funding, but do so quietly among your senior staff. It is not the time to rattle the confidence of your troops. As you sit in the normal business meetings which fill so many days, keep in mind that you need to quietly remind your colleagues NOW of the important projects currently underway – and their strategic impact for the organization.
Driving innovation and enabling change are two hallmarks of successful business leaders. Capital is one of the critical ingredients. If we assume that 2010 will be a bumpy ride, then securing, maintaining and managing capital funding levels rises to a top 5 priority item.
Personally, I think the mid-year dip will be followed by a relatively robust rebound freeing up capital funding very late in the budget year. Thoughts on how to take full advantage of that scenario will be discussed in future postings . . .