An Excerpt From the IPA Book, Capital Projects
The following article is published with the author’s permission.
The proven processes to create more business value from investments and prevent value erosion are well known and largely accepted, at least on the surface. Three-quarters of IPA’s clients have a perfectly serviceable capital project development and delivery process. The process covers the entire life cycle of the project from inception to the point when the asset is put in service. Let’s say R&D is finishing up the development of a new product and a new manufacturing facility is needed to make the product. The usual process for creating an asset combines a set of defined development stages with decision gates at the end of each stage. The stage-gate process for this opportunity starts when someone is assigned to investigate ways to produce the new product. The process ends when the factory is in service. The stages sequence work in the order needed to identify and deliver value, and the gates allow executives to control the project’s progress through the process. The process is managed by a project governance structure that assigns different executives specific roles and responsibilities, creating the checks and balances needed for good project decision making.
There isn’t even much debate company to company on what the process should look like. Although there are some differences to accommodate a particular industry, there is very little substantive difference in the fundamental approach companies take toward capital project development.
Moreover, the process works—when it is used correctly. Projects that followed a process, on average, actually added slightly more value than what was forecast when the project was funded, while projects that did not meet any of the process requirements eroded about half the expected NPV (see table below). The average 22 percent value erosion shows that most projects sort of muddle through, meeting some requirements while not meeting others.
Projects That Meet the Stage-Gate Process Requirements
| Met All Requirements
||Met Some Requirements
||Did Not Meet Any Requirements
|Value Delivery (Actual NPV/Expect NPV)||+5%||> -22%||-45%|
The assets created by projects that followed the process were much less likely to face a lack of demand, have cost and schedule overruns, or have performance issues. Critically important to understand is that there are no average differences in the market risk and external project risk faced by the projects in the three categories. That is, the projects that met all the requirements were not any less complex or inherently less risky than those that did not. Rather, using the stage-gate process effectively allowed executives to navigate through the complexity, address risks, and deliver better results. Throughout the book, I am going to give specific examples, both good and bad, to illustrate how you can use the process to get better results for your projects.
Capital Projects: What Every Executive Needs to Know to Avoid Costly Mistakes and Make Major Investments Pay Off (John Wiley and Sons, 2016). Available wherever books and e-books are sold.