Capital spending in 2017
Private company issues and opportunities
Faced with growing uncertainty surrounding technology, globalization, and political and economic policy changes, many private companies are re-examining how they allocate capital. Demands on capital budgets are becoming more complex, from cybersecurity to maintaining global supply chains. Many private companies find themselves having to make spending decisions more quickly in an environment in which they already must do more with less. Senior management faces the challenge of improving their strategy development and processes for measuring risk to ensure that capital is spent where the company needs it most.
Many private companies feel they do not spend capital as effectively as they should.1 Often, the items that are given priority aren’t necessarily the ones that will benefit the company most at a given point in time. “You have a lot of stakeholders and a lot of different kinds of requests,” says Charles Alsdorf, a managing director and capital efficiency leader for Deloitte Transactions and Business Analytics LLP. One division may ask to increase spending on maintenance, another to deploy capital for entering a new market or developing a new product, and yet another for sprucing up the office and improving employee morale. Each of these is important, and senior management must determine which spending options get priority. They are looking for better ways to make these hard trade-off decisions.
Technology is advancing rapidly, and new data and analytics programs can help companies operate more efficiently and reduce costs; however, adding technology potentially could create a greater vulnerability to hacking and other cyber threats. Globalization poses similar challenges, offering potential markets for growth, but also present new risks for companies unfamiliar with local politics, tax policy, or currency issues. This can create added complexity that can complicate capital spending decisions. In an uncertain political and tax environment, senior managers must decide if they should invest in a foreign factory or outsource production. They are searching for more insights on how to plan for and respond to strategic and operating risks.
Credit markets, too, are changing. Private companies must weigh their capital spending needs against the prospect of higher interest rates. “In the past, when there’s been a shift in the credit markets, we’ve seen greater separation between the haves and the have nots,” Alsdorf says. “Private companies should think about how to prepare if credit gets tighter.” That may mean refinancing debt for a longer tenure, or securing credit at current rates even if a capital project is several years away. “Now is a good time to build in some flexibility,” he adds.
In an increasingly complex global marketplace, private companies are refining their planning and decision making to improve the effectiveness of their capital spending. In our recent annual survey of private companies, many senior executives said they feel a need to cut back: 63 percent said their company was holding off on making major investments because of uncertainty in the business environment, up from 39 percent a year ago.2 “There are more constraints on capital, and when you add in the uncertainty, that can create some tough decisions,” Alsdorf said.
Typically, senior management sets strategic targets once a year, with little input from the front lines of the business. “The opportunity at the senior management level is to bring that strategic discussion into a manageable framework that measures the hard trade-offs and the impact of risk, so that people throughout the company can get better feedback on their capital proposals,” Alsdorf says. This enables mid-level managers to determine if spending requests align with the overall company strategy.
At the same time, the process can provide broader feedback on risks that could hurt the business or that could open new business opportunities. By assessing and monitoring the biggest risks and their potential impact, private companies can adjust capital spending accordingly to ensure resources are allocated dynamically where they can do the most good.
Big data also can help companies identify potential risks and potential savings. “There are lots of ways that big data can help you make smarter capital investments,” Alsdorf says. For example, it is increasingly possible to use sensing technology to assess the actual condition of capital equipment and forecast potential failures across several factories, enabling the company to improve maintenance operations and capital spend.
The evolving nature of big data means that companies must have a long-term strategy for evaluating and adopting new technology and data, as well as assessing the risks that can come from having more equipment networked and potentially vulnerable to cyberattacks. Concerns about technology often get overshadowed by the potential benefits. Many companies are willing to spend more on technology they believe will boost revenue, but are less willing to spend on security.
Adding to the decision making challenge is that it is generally easier to measure the cost of these technology investments than it is to measure their business benefits. “Security spending is all about risk mitigation,” Alsdorf says. “The onus is on senior management for setting the stage on strategy, for translating strategic objectives into a trade-off framework and key observable metrics, and for measuring risk and opportunity.”
As political and economic policy changes make global markets more uncertain, leading companies are developing contingency plans for each market that could affect their operations or supply chains. This helps them make decisions such as whether to reduce or increase production, how to prioritize capital expenditures, and what capital structure and financing options may provide the best risk-return profile.
Questions to consider
- Are your capital spending plans contingent and do they give you the flexibility to react to changes in each market?
- Do you have processes and metrics in place that incorporate input from the front lines of each business in your capital spending program and prepare you for making hard trade-off decisions?
- Have you thought about how targeted capital spending can address various risks that could result threats to your business?
- How are you using data analytics to improve your spending decision making?
1 In a Deloitte webcast for Private Companies, entitled “Capital Expenditure Planning: A Structured, Portfolio Approach,” May 22, 2013, participants were asked, “How confident are you in your company's ability to make optimal decisions about the portfolio of proposed capital projects?” Of the 1,280 executives responding, only 40 percent said they were confident or very confident; the remaining 60 percent were not.
2 “America’s economic engine – Breaking the cycle,” Deloitte LLP, February 2017, https://www.deloitte/us/dges/breakingthecycle.