Do you prepare proposals for capital spending, or review spending proposals before approving them? If so, here's a list of ten suggestions I often give to the folks I work with - suggestions which should make proposals more complete and thoughtful. The suggestions should work for any capital investment, whether for software, hardware, property, equipment, vehicles, or other.
- Be clear on the project objective, and state it clearly in the proposal. Remember that the objective is the business result that the project will achieve, not the "stuff" you are going to buy and install. Tie the objective back to value, as defined by the customer. Projects that increase value as defined by the customer, or reduce non-value add activities or reduce waste are what you should spend your money on. Look especially for projects that improve on one or more of the five key metrics of lean organizations: total cost, total cycle time, delivery performance, quality and safety.
- Provide evidence to support any promises made in the proposal. Where possible, include the results of pilot scale trials, other experiments, and documented successes elsewhere. Be sure to include negative data - no proposal is perfect, and a "perfect" proposal lacks credibility.
- Complete a careful Potential Problem Analysis. No plan is perfect, and studies show that even experts tend to underestimate time and cost on projects. In the proposal document, list major project steps, things that could go wrong at each step, what you will do to prevent them from happening, what you will do to minimize the damage if one or more occur anyway, and how you will monitor the project to catch problems early on.
- Describe the project clearly. Always include drawings. Avoid leaving "black boxes" of unknowns to be filled after approval.
- Present more than one "real" alternative. Include "do nothing" as an alternative, but that's not enough. While developing the proposal you should have developed and rejected several other alternatives. Lay them out, explaining how the proposed alternative best meets project objectives.
- Use the "minimum effective design" approach. Start with the lowest cost alternative that just meets project objectives. Show how any capital investment above that minimum is justified by a high incremental return.
- When proposing backup or standby units, to be used in case of failure of the main unit, show what has been done to increase reliability of the main unit first. Then show the savings the backup unit will provide over time, given the new reliability figures on the main unit. In other words, make sure what you already have is "lean" before proposing additional equipment.
- If your proposal will have any effect on final product or service quality - on value as the customer defines it - have the marketing folks involved from day 1, and make it a joint proposal. If your proposal won't have any effect on value as the customer defines it, explain why it needs to be done anyway. Or just don't do it.
- If your proposal will increase output, back it up with compelling market evidence that demand is there (or will be there). Excess capacity that cannot be utilized is expensive and wasteful. Show how you have used "lean" principles to squeeze all potential capacity out of what you already have before spending on new equipment.
- Be specific. Instead of saying a project will "...avoid significant future cost," for example, say, "The new equipment will decrease setup time by 90 percent, increasing EBITDA by $1 million per year."
As you review this list, I hope you get the idea that I want to make it pretty tough to spend scarce capital on any but the most robust projects. One of the easiest ways to destroy organization value is to throw away precious cash on investments that should not have been made. You need to invest, yes, to maintain and grow the business. But some organizations make it far too easy to throw capital after problems and opportunities, while spending too little management resources on non-capital solutions.
