I have been saying for some time that major capital projects often have a large political component to them. Throughout my career, this has been true to a certain extent, in the modern age with animation and graphical availability available to everyone, it is become even more the norm rather than the exception.
Board members, and nearly all capital projects reach a threshold, either alone or bundled with others, that board approval is required. It has become de rigueur that proposal for capital expenditure be served up with flashy graphics, animation and so forth to impress the board members. Internally, or externally with freelancers, these documents have become media worthy of an Academy Award.
Only one problem, such a presentation of baubles masks the meat and hard questions of the consideration at hand. Of course, this is the exact intention of the project sponsor. Don't bother these folks with messy numbers, they are too busy for that; give pictures, drone shots, 3-D fly throughs of proposed facilities, do anything to keep them from zeroing in on the real return.
The roadway to success is littered with ditches full of projects sold without substantive analysis. They are "picture perfect" projects built on a foundation of sand.
In our industry, repetitive exercise of such foolish project selection means has put many a company out of business. Yes, we hear that such and such a company went out of business because markets changed and the last three capital projects did not anticipate the markets change. News alert: predicting the markets is part of the analysis. Predicting the markets correctly is the first step, not the last step in considering a future capital project.
Join us in Guatemala next summer for the 3rd Paperitalo Papermakers' Mission Trip [12.06.18]
Yet, if you have been involved in this process, think back. How many times have you seen the gee-whiz new stuff presented first and the markets talked about, "if we have time," after lunch?
Equally given short shrift, although usually not quite the same disaster as missing the market analysis, is the assessment of raw material supply and energy. In one case, I even saw the supply of labor miss the mark so badly that it affected performance of the new facility for many years.
All capital projects are strategic; all capital projects are political. If you are in any kind of position of authority and responsibility it is your fiduciary duty to stand up and wave your arms if the proper, rigorous analysis is not performed. It can be your career, if not the future of your company that is at stake.
Sometimes it is best to bring in a qualified outsider or a team of outside experts to oversee that analysis you have done. The people who can do this properly are rare. Their contract needs to be limited so that there is no chance they receive any future compensation from this project, up or down, despite their recommendations. This is one way to de-politicize the situation and have a chance at delivering a competent go/no go verdict.
For safety this week, I have seen compromises made in safety expenses to get a project in under the wire financially. Of course, this always fails, hopefully it fails in time to correct with just money, not injury or loss of life or property.
Be safe and we will talk next week.