Only a small fraction of companies in asset-intensive industries reliably achieve expected ROI for major capital projects 90 percent of the time, according to a new industry study. In addition, 12 percent of companies see expected ROIs in less than half of their capital projects.
The problem: no matter how sophisticated and far-reaching the planning processes are, many organizations struggle to manage risks or reap the expected value from major capital investments.
The data is part of the larger survey of companies in oil and gas, mining and metals, chemicals, and utilities industries. The results appear in Prepare for the Unexpected: Investment Planning in Asset-Intensive Industries, a comprehensive new report sponsored by Oracle and developed by the Economist Intelligence Unit.
Analysts say the shortcomings in large-scale, long-duration capital-investments projects often stem from immature capital-planning processes. The poor decisions that result can lead to significant financial losses and disappointing project benefits, which are particularly harmful to organizations during economic downturns.
The report highlights three other important findings.
Teaming the right data and people doesn’t guarantee that ROI goals will be achieved. Despite involving cross-functional teams and looking at all the pertinent data, executives are still failing to identify risks and deliver bottom-line results on capital projects. Effective processes are the missing link.
Project-planning processes are weakest when it comes to risk management and predicting costs and ROI. Organizations participating in the study said they fail to achieve expected ROI because they regularly experience unexpected events that derail schedules and inflate budgets. But executives believe that using more-robust risk management and project planning strategies will help avoid delays, improve ROI, and more accurately predict the long-term cost of initiatives.
Planning for unexpected events is a key to success. External factors, such as changing market conditions and evolving government policies are difficult to forecast precisely, so organizations need to build flexibility into project plans to make it easier to adapt to the changes.
The report outlines a series of steps executives can take to address these shortcomings and improve their capital-planning processes. Read the full report or take the benchmarking survey and find out how your organization compares.