Prepare for the unexpected: Investment planning in asset-intensive industries is an Economist Intelligence Unit research report, sponsored by Oracle. We conducted the survey and analysis and wrote the report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.
Introduction
Capital planning in asset-intensive industries is fraught with difficulties. Only 11% of companies surveyed by the Economist Intelligence Unit in October 2010 report delivering the expected return on investment (ROI) on major capital projects 90-100% of the time, and 12% report delivering planned ROI less than half the time. No matter how robust and far-reaching their planning processes, organisations in the oil and gas, mining and metals, utilities and chemicals industries struggle to manage risks, predict levels of ROI and reap the expected value from major capital investments.
Considering the massive scope and long duration of these capital investments, such low rates of success indicate a lack of maturity in capital planning processes. Making bad decisions when the stakes are so high can lead to huge financial losses on capital investments, an unacceptable outcome, particularly under stressful economic conditions in which already slim margins become even tighter.
Shortcomings in asset-intensive companies' capital planning processes accentuate these problems. Organisations with immature practices can learn from organisations that have strategies to improve the return on their capital investment projects.
Our findings include:
Even companies that use the right data and people often fail to meet goals owing to ineffective decision-making. Despite involving cross-functional teams and looking at all the pertinent data, executives are still failing to identify risks and deliver bottom-line results on capital projects. Effective processes are the missing link.
Upfront activities—risk management, and predicting cost and ROI—are the areas in which companies' project planning processes are weakest. Respondents say their companies rarely achieve expected ROI on projects, and regularly experience unexpected events that derail schedules and inflate budgets. The survey shows that executives believe strongly that using more robust risk management and project planning strategies will help them avoid delays, improve ROI, and more accurately predict the true long-term cost of these initiatives.
The unexpected should be expected. External factors, such as changing market conditions, evolving government policies and regulations and fluctuating input costs are difficult to forecast precisely. Building flexibility into project plans makes it easier for companies to adapt to the changes and successfully execute their projects.
