Welcome back to this week’s installment of Whitepaper Wednesday on the Purchasing Certification Blog.
As I did with last week’s installment on the laws of leadership, I will focus this week’s installment more on executive-level thinking. Specifically, I’ll be reviewing a whitepaper entitled “CFO insights: Capital budgeting in the downturn: Four disciplines” from cfo.com and Deloitte.
This whitepaper is written in the context of an economic downturn. And, in such downturns, CFO’s will closely scrutinize capital projects (i.e., purchases of expensive, long-term assets, such as equipment, facilities, vehicles, etc.).
Procurement may be involved either because it is seeking approval for a project of its own or because it is assisting an internal customer department with the total project. So, it is important to know what is going on in the mind of the CFO to know whether you stand a chance at getting approval for the project. The whitepaper does a good job of getting into the mind of the CFO.
The whitepaper starts off powerfully by stating: “The credit crisis and the rapid deterioration in the global economy have left many CFOs scrambling to cut costs and reprioritize budgets. Cash is king for now and finance organizations are scrambling to better forecast cash flows in and out of the company, reprioritize projects to rejuvenate cash inflows in the near term, [and] reprioritize projects to balance long-term capital plans and strategic goals with near-term cash flow and cost reduction objectives.”
The whitepaper introduces four “disciplines” that CFO’s can apply to their evaluation of capital projects as an alternative to across-the-board budget cuts. Here’s a summary of each of these four disciplines…
1. Clean-Sheet Budgeting. This approach evaluates capital projects strictly on return on investment of each future dollar being spent, irrespective of what has already been spent. The whitepaper says that, under this discipline, “All projects should be quickly reassessed with a clean sheet.” This approach can be scary to think that a company can have invested millions of dollars in a project only to cancel it and essentially waste all the money spent to date. But it is important to know how some CFO’s think. And it’s not uncommon to hear of such projects meeting this type of fate.
2. The Shortest Time To A Positive Benefit Discipline. This approach deals with how CFO’s can prioritize several projects under consideration and invest in them in a phased – as opposed to an all-at-one time – sequence. It involves estimating the timeframe in which the organization can recoup its investment and then investing in those projects with the shortest time-to-ROI first.
3. The Less Than 100% Budget. This approach encourages the CFO to prod requestors for alternate scenarios rather than just one “full wish list.” The CFO is encouraged to ask “[W]hat can be accomplished and in what timeframe with 70%, 80% or 90% of the proposed budget?”
4. The Discipline of Deferral. This approach encourages the CFO to explore whether or not a proposed project can be done later without major repercussions. The whitepaper also suggests using this approach to prioritize competing projects, saying “If two projects are of equal value in all other aspects, and if they are deferred by a year, one project might be significantly hurt (e.g., the opportunity to beat competition to the market with a new offering will be lost), while another project might simply achieve nearly the same level of benefits but these benefits occur one year later (e.g., a data warehousing initiative). Then the project likely to suffer the most from a deferral should be giving funding priority.”
So, as you can see, this whitepaper has value for those trying to understand how senior management thinks. Hopefully, you are not only trying to understand senior management, but also aspiring to become senior management some day!
With this in mind, I recommend downloading (and keeping) a copy of this whitepaper for yourself. You can find it at CFO.com.
I know that about 75% of the readers of this blog are buyers and purchasing/supply managers. So I often do try to keep the content of the blog relevant to solving the problems you face on a day-to-day basis. However, I am also committed to helping you develop and advance in the profession. And I also want to appeal more to the directors, vice presidents, and CPO’s who frequent this blog as well. So, in the coming weeks, you can expect to see more posts about leadership and executive-level thinking. Do you agree with this approach? Post a comment by clicking the comment link below. This blog is for you – I want to deliver exactly what you want. And the only way I can know what you want is for you to share your thoughts. Thank you in advance!
P.S. Whitepaper Wednesday will not appear next Wednesday (July 1, 2009) as this blog will feature a big announcement that will rock the purchasing certification world.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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