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What does it take for a company to move from good to great?
Excellent leadership, superior products, quality customers may come to mind. One element that likely does not come to mind is capital expenditure planning, yet companies who are proficient at deploying capital can increase future profits and return on investment for their shareholders. This makes CapEx planning an important catalyst for growth and tool for moving a company from good to great.
CFOs play an important role in determining the company's return on investment capital. CFOs are major stakeholders in the capital-expenditure process. They understand the company's strategy and capital project requirements, and balance sheet and cash flow constraints.
The CFO’s impact on company success can be significant, particularly at capital-intensive companies. For example, a project expected to generate a three times net present value on investment capital, a ten percent improvement in return on investment (ROI), translates into a 30 percent gain when compared to the capital budget. A company with $100 million in CapEx would generate $30 million in annual value.
ViaWest, a company that builds and manages hybrid IT solutions for enterprises, operates in a growing industry where speed to market is critical. The company must innovate and invest in a cost effective way to meet growing client demands. Predictive data helps identify future market and client capacity, and product needs. With this data, ViaWest is able to forecast future capital requirements.
ViaWest also maintains strong, long-term relationships with their key suppliers. This allows the company to complete projects in a scalable and efficient manner. Michael Krza, CFO for ViaWest, said of the company’s CapEx planning program, “We work with our design team partners to build new data centers. The design team creates a modular master plan to build out data centers as needed. Expansion is done in a just in time fashion rather than building out the complete data center before it is needed.For example, we used this modular approach for our South Denver data center. We purchased the land and designed the building to fit. Using the modular approach, we first built out our 90,000 square foot facility and planned for the eventual 130,000 square foot expansion. Because we planned the expansion from the beginning, we were able to grow in a thoughtful way and did not incur the extra cost of redundant infrastructure.” Strong vendor relationships also lead to reduced capital project cycle time and improved quality for the client. The result is better client delivery and a better client experience.
An effective CapEx planning program includes a strategic framework that allows leaders to cross-reference capital investments with the company’s strategic goals. This helps to identify areas where capital spending should increase or decrease based on gaps or redundancies. The program should also include a high level of commitment to the process, accurate metrics and measures for evaluation, standardized processes to govern decision-making, and proper organizational skill set.
At ViaWest, the executive committee and their parent company, Shaw Communications Inc., prepare and approve the annual CapEx Plan. Approximately 90 percent of the company’s capital goes to success-based projects - expenditures essential to support client needs and company top line growth. The rest goes to maintenance and optimization projects.
ViaWest begins the CapEx planning process by forecasting long-term client demand, pricing, and other potential market impacts. The company prioritizes capital projects based on the cost-benefit related to revenue protection, cost efficiency, and return on invested capital. To test the company’s CapEx portfolio, ViaWest uses an ROI capital threshold for long-term projects and internal rate of return (IRR) for shorter duration assets. Company executives review the five-year capital plan with a focus on the next six quarters.
Even with best practices in place, the CapEx planning process doesn’t always go smoothly. ViaWest is quick to react when things don’t go according to plan. The company is vigilant in managing their supply chain and pricing. For example, changes in the labor market could increase cost, market-driven commodities could affect profit margins, and building costs could throw off the company’s cost structure. The company may respond by reducing the scope of a project or delaying the project. In extreme situations where the project's cost structure exceeds the company’s ROI threshold, the project is cancelled.
CFOs play a major role in determining the company’s return on investment capital. Using a capital productivity framework and aligning the CapEx plan with company strategy leads to improved portfolio returns, better monitoring and reporting tools, and enhanced processes. Extra benefits include expanded process efficiency, deeper alignment of strategic vision, and enhanced data accuracy and decision-making. Effective CapEx planning can be a catalyst for growth and make a good company great.
Renita Wolf is a Colorado-based financial executive, member of the FEI Colorado Chapter, and chair of the FEI Diversity and Inclusion Action Team.