When capital projects fail, it is almost always preventable. Inefficiency, underestimated timelines, and unforeseen costs are the primary weights that drag a project down-and they are all avoidable with good management. Capital Projects gives you the insight and practical tools you need to drive a successful project.
Falling Short of Expectations
How Executives Struggle to Deliver the Value from Their Capital Projects
Executives often start out with high hopes for their capital projects, only to have them fall short of expectations. Capital projects are investments of substantial company resources to develop, to improve, or to refurbish an asset that is expected to generate cash flows for more than one year. Only 60 percent of finished projects actually meet all objectives after the project is complete and the asset was put into service. 1 The success rate is not much better than a coin flip. The complaints about projects range from business cases ruined by cost overruns, to market windows missed because the project was late, to assets that did not perform as expected and that are expensive to operate.
As an executive responsible for capital, you do not have to accept these results. Success or failure is not random. I will show you what you can do to increase the probability of a successful project, make your project portfolio pay off as expected, and, critically, reduce the chances of the disaster project that loses all the capital investment and gets executives fired. The road to success starts with you. Success will require your active leadership and participation in the projects that you are sponsoring or that your organization has a major role in.
How do executives cause projects to fail? Here is a real example. A company initiated a small project to boost operating margins by consolidating production at one factory. The plan was to relocate some equipment from an older factory to a newer one before shutting down and selling the old factory. The project had a very strong business case and was expected to pay back its investment in less than a year. A critical success factor for the project was to have the consolidated facility up and running in time for a three-month production period when the factory would be run at full capacity. The factory was used to process an agricultural product, and the new factory had to be ready for the harvest. The project was a failure because the consolidated factory was only able to run at half capacity during the production window. The business needed three supplemental projects to finally bring the facility up to full capacity.
So, what happened? How did this project turn out to be a failure-and why were the executives in charge responsible? Many mistakes were made, but the most important one was that the executives delayed the start of the project so that the older facility could finish a production run. Another bad decision was not allowing the project team to get input from the operators of the old factory because of the sensitivities of shutting down the old factory where people were about to lose their jobs. The late start caused mistakes in the technical design because of the rush to get the work done. And because the team could not work with the factory operators, they had to make assumptions about how the equipment would be reused-and those assumptions turned out to be wrong.
The root cause of the failure was that the executives never reconciled the conflict in their objectives. On one hand, they wanted to keep the old factory running and delay the announcement of the closing for as long as possible. On the other hand, they wanted the consolidated factory up and running in time for an important seasonal window. The desire to achieve both objectives is understandable. Executives face tremendous pressure to deliver value from capital. Delivering that value often requires meeting targets that are hard to achieve. In this case, the executives should have acknowledged the risk in the objectives and developed a strategy to reduce the risk. The mitigation would have lengthened the payback period but would have still allowed for a profitable project. Instead, the business lost money on the investme