Published August 2 2021
In our last blog piece, we discussed Whole Life Value, and how it can be used to derive long-lasting, ongoing value from an investment throughout the entire life cycle. However, while analysing and quantifying planned investments with Whole Life Value in mind yields significant advantages, many organisations continue to miss opportunities by losing sight of value, and what it means to them.
When we talk about value as an industry, it is often assumed to mean return on investment – and while that is one way value can manifest itself, it is often not the only or even the most important measure of it.
“Value” means something different to every organisation, but this is a realisation that many organisations never have the opportunity to come to, instead falling into the trap that “value” is simply a synonym for “return on investment”. Challenge yourself: what do you look to as a sign that your organisation is performing the way you want it to? It could be profit, but it could also be reaching sustainability goals, consistently meeting demand, or reducing costs and input.
Let’s return to the misconception of value: how does this hinder an organisation’s investment choices and decisions?
According to Investopedia, “capital expenditures are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company. Capital spending is different from other types of spending that focus on short-term operating expenses, such as overhead expenses or payments to suppliers and creditors.”
Despite being a long-term investment, capital expenditure often only focuses on budget, schedule and total cost of ownership: i.e how much money do we have to spend, when do we need our new asset by, and how much can we expect to spend on the asset in its direct and indirect costs?
Because investments are analysed and planned around budget and total cost of ownership, value is judged by the same metrics – but what if you defined what value means to you first?
We briefly mentioned strategic value in our last blog piece – and it’s one of the best examples of how defining value before analysing and deciding a new investment can yield dividends.
When analysing a new investment, you may find that without realising, you view it through tunnel vision, seeing it only in the context of its intended purpose – but what if it has purposes or uses you can take advantage of either in the present or at a future date, when certain conditions have been met? Preparing for the “what if”s is one of the most crucial steps on any investment, and yet the scale and scope of “what if”s many investors consider is extremely small.
You may also identify ways of extracting value through taking into account the little details: maintenance costs, comparative risks, and sustainability goals.
With some many variable details in the mix, it’s easy to see why organisations lose track and begin missing the less commonly analysed details in favour of the big picture.
However, there is a way to ensure that no stone is left unturned, with real, quantifiable analysis to support each investment option. In our next blog piece, we’ll discuss our proprietary analysis method – KBEE – and how you can use it to make wiser decisions and better investments.