Protecting capital investment using staged release of funding

Does your organization have finite capital budgets? Are your programmes and projects spending more than their original allocated budgets? If so, read below to learn how your organization can protect capital investments in programmes and projects whilst maximizing return on investment.

Most organisations, in any industry or sector, have mixed results delivering the promised programme and project forecast benefits and value. That is, what ought to be the underlying rationale for the investment to achieve the stated organisational (including strategic investment) objectives against the allocated resources particularly people and money. In this context, capital investment refers to the total whole of life costs invested by a sponsoring organisation with the understanding that the finite funds will be used to purchase fixed assets and services, rather than used to cover the business's day-to-day operating expenses. 

Typically Information and Communications Technology (ICT) spending is often the largest single capital investment for most organisations, ranging from routine productivity improvements to business change transformation. There is a common belief that increasing investment in ICT is always desirable. However, financial and measurable benefits achieved by increased spending are difficult to identify and measure without a tailored benefits category framework in place understood by all and applicable to all change initiatives regardless of complexity. 

Without defined and measurable benefits unpinning investment decisions, the contrary seems impossible to prove - an information paradox - that often troubles accountable officers and sponsoring organisations when programmes and projects are challenged to justify spending in terms of viability, desirability and achievability. If change initiatives are not delivered effectively, or if they are delivered late or at extra cost, there will inevitably be adverse impacts on benefits realisation in operational service particularly where an - operational benefit owner - is not identified prior to project commencement. This critical role is a business representative who is accountable for benefit measurement and the management of any change activities required to ensure benefits are realised once handover as occurred and project closure is finalised.

In an era of doing more with less, one-off investment decision making is no longer appropriate and does little to protect finite capital budget spending. APMG International’s guidance by Stephen Jenner - Managing Benefits - Optimising the Return from Investments, encourages organisations to adopt a structured funding release by gated review process. This should be linked to agreed control points in the programme or project lifecycle, particularly where iterative investment decisions ought to be made aligned to the business case development process for the strategic outline case, outline business case and the full business case prior to full capital investment as guided by Better Business Cases™. 

By adopting this approach, sponsoring organisations particularly the main investment board have greater control and visibility of capital spending against performance, based on the delivery confidence assessment in the gateway review report for each key decision point.  Delivery confidence, independently assessed by an expert review team who have the right mix of skills and experience, allows for informed and objective oversight of the program or project’s ability to deliver the required outcomes (result from change). It is these outcomes that enable benefits realisation to occur and why success ought to be progressively assessed against agreed objectives, and whether the programme or project is still on track to deliver to time, cost, scope and quality parameters. 

Investments mean committing resources (funding, people, services, assets and materials) to deliver products and services with the expectation of receiving future benefits. The New Zealand Government recognises that owning the right assets, managing them well, funding them sustainably, and managing risks to finite budgets are all critical to public services being cost effective and high quality. As such, it has introduced their Investor Confidence Rating (ICR) system, a formal assessment of the performance of how Government agencies are managing critical investments and assets.  The ICR provides an indication of the level of confidence that key investors (such as Cabinet and Ministers) have in an agency’s ability to deliver a promised investment result if they commit to funding. When combined with a staged investment approach and a realistic benefits plan, capital investment can be effaciously managed.

From a portfolio management perspective, staged funding by gated review linked to delivery confidence assessment allows for the strongest initiatives to continue particularly where an initiative achieves an Amber/Red or Red that denotes successful delivery is in doubt. In this scenario, prompt action by the main investment board is required to redress any significant risks to establish whether resolution is financially feasible and where additional money spent results in additional benefits. If this cannot be established, then consideration should be made to discontinue the programme or project. A staged approach to planning and the release of capital funds enables organisations to more effectively close prior to full investment, where appropriate as part of a balanced portfolio. Like Henry Ford once famously said “Failure is simply the opportunity to start again, this time more intelligently”.

Incremental rather than one-off investment decision making, based on the technique of staged release of funding allows investment decisions to be broken down into a series of stages, separated by stop/go control points. This gated and incremental commitment to capital investment ensures that unviable initiatives are identified and stopped early, thereby protecting finite capital funds. It enables money saved to be redirected to initiate the next highest ranking proposal in the investment pipeline. 

By learning to fail faster, organisations can minimise resource expenditure when scrutinisation reveals a programme or project is not working and to try something else, a concept known as pivoting. As such, continued investment decision making in programmes and projects should be based on incremental (future) costs against measurable benefits and should ignore what has already happened i.e. sunk costs. Generally speaking, organisations find it difficult to ignore spend to date when deciding whether to continue to invest in an initiative particularly in terms of ongoing viability, desirability and achievability. 

However, once organisations have actually committed a large sum, they are more inclined to further invest - more than they would have accepted to spend at the beginning. This phenomenon is actually called the “conspiracy of continuation”, where initiatives are rarely stopped once they are started - despite being subject to independent gateway reviews prior to each key decision point. The challenge for any organisation is to confirm that the total accumulative spend equates to additional measurable benefits and return on investment.  If an organisation does not recognise that benefits for this capital investment may not be realised until a time period after the programme or project is completed, the ability to amortise this initial investment across a longer period is potentially lost.  As such, organisations ought to ensure that benefits realisation plans and business cases remain continually aligned and approved at the same time when making investment decisions.

In summary, continued staged funding of initiatives ought to be dependent upon incremental benefits exceeding the costs required to realise them, and continuing organisational commitment to track, monitor and report the realisation of forecast benefits stated in the business case. By releasing required funds incrementally by stage supported by an independent and objective gateway review report, organisations can be confident of continued business justification and delivery of strategic investment objectives and agreed forecast benefits. Basing investment decisions on delivery confidence assessment reduces the risk and costs of programme and project failure and increases the chance of delivery success. In this way capital funding can be linked to regular reconfirmation that the forecast benefits (used to support business justification) will be realised and that they continue to represent value for money and return on investment.