The following is a contributed article from Rich Feldman, vice president of Finario. Opinions expressed are author's own.
You did the research. You’ve done the demos. A subscription-based cloud solution for managing your capital expenditures is the way to go. But now you have to defend the investment to your CEO and board.
To you, it might be a no-brainer. The value of moving away from spreadsheets, Sharepoint, Lotus Notes or other outdated system couldn’t be clearer. You know how challenging it is using an ill-suited system for your capital expenditures when you're under the gun to vet them, get approvals and then report on them.
But to others in the organization, it might not be so obvious.
There are three typical objections to your plans: the organization has competing priorities, it’s not clear how much of a real dollar impact the new system will have, and the IT department has concerns.
The fact is, there's a strong case to be made against all of these arguments. Let me share what I think your colleagues ought to know as you try to show the value of transforming your process.
The concept of digital transformation of finance has become such a hot-button issue in large enterprises that it’s no surprise that many organizations struggle with building their roadmap.
Truth is, it shouldn’t be an all or nothing decision. Every capital-intensive enterprise needs an enterprise resource planning (ERP) system such as SAP to keep the books and an enterprise performance management (EPM) system such as Hyperion to manage operating expense budgeting and forecasting.
But you also need an enterprise capital planning (ECP) system for your capital expenditures (capex) to prioritize and approve projects and forecast capital investment.
Adding an ECP to your finance stack reflects the critical importance that capex has on competitiveness, innovation and growth. Ultimately, "improving capital allocation … can generate substantial improvements in returns on capital expenditures, and thus in shareholder value," say Larry Jones and Ellen Kilpatrick of PricewaterhouseCoopers.
They call capex an overlooked lever in boosting shareholder returns. "The key is to develop a robust valuation methodology, apply it using sophisticated optimization tools, and create a comprehensive governance process to support the efforts," they say.
So when the competing priorities issue arises, the counter argument should point out that few things in the corporation are as important as efficient and effective capital allocation.
Even for those organizations that are less ambitious in elevating their strategic approach to capex, the case for digitally transforming the process for approvals and workflow is compelling. The key is to calculate a real-dollar ROI. Here’s one way to do that.
First, calculate the all-but-certain improvements in efficiency and productivity. You do that by puling together the cumulative labor hours spent on populating and tracking spreadsheets, repetitive data entry and reconciliation, manual production of reports, etc. Be sure these costs are fully loaded (i.e., with benefits and overhead). As much as 75% of this number can be added to your real-dollar savings.
According to McKinsey & Company, achieving world-class capex management can drive a 15-25% reduction in overall capital spend coupled with an improvement of 2-4% in return on invested capital (ROIC). "Some firms have even achieved a staggering 50% reduction in year-on-year capex portfolio spending," the company says.
So, to calculate your real-dollar impact, take your total annual capex spend and multiply it by a percentage reflecting a conservative, but reliable, take on projects that shouldn’t have been started in the first place, include "rogue" spending or "gold-plated" assumptions, overruns, projects that were not properly risk-adjusted, etc.
Leveraging data from concluded projects (post-completion review) will impact the ability to make better decisions going forward.
To quantify the potential benefit, estimate the total projected return on your capital portfolio (i.e., spend x expected return) and then estimate how much better you think you could do year-over-year. For example, if you spend $250 million a year with an estimated return of $1 billion, doing just 2% better would be worth $15 million per year.
A digital transformation project often starts in finance, and comes to a screeching halt when presented to IT. Two concerns are typically raised, and neither have to be show stoppers.
- Implementation. From IT’s perspective, each new system presents a cost in terms of the time to implement and the risk of performance or security issues. While the cloud has reduced these costs dramatically, not all IT departments have come around. Some might cling to outdated notions or are simply trying to retain influence and justify their headcount and budget. If this is the case, here’s what you might focus on:
- Your real-dollar impact assessment. Your IT leadership understands the impact they have on your organization’s success and will get behind a sound business case.
- The track record of your proposed vendor for managing your capex. You want to be working with a software-as-a-service (SaaS) firm that is well established with referenceable enterprise customers like yourself, and one that has a SOC 2 security audit procedure in place. The latter should help allay any security concerns your IT department might raise. If they protest, remember that large company networks are much more likely to be breached than a SaaS system.
- Integration. The benefit of integrating a ECP to ERP, EPM, project management and fixed asset applications can be substantial in reducing duplicative data entry, eliminating errors and speeding up reporting. This big-picture view and single source of truth is how the full promise of the digital transformation of finance is realized.
- Upfront IT involvement. Engaging IT early in the process, and confirming the availability of appropriate internal resources (and if not engaging an external IT services provider) will be invaluable. At the end of the day, when pitching your digital transformation project for final approval, having advocates in IT will invariably make a difference in getting over the finish line … and implemented.
Having arguments in place to help you respond to these three common objections should improve your chances of getting buy-in from your colleagues. The facts are on your side. It’s just a matter of making others in the organization aware of how beneficial transforming your management of capital expenditures can be to the bottom line.