Has your business got the operations vs projects balance right?
In this article, we would like to draw your attention to the balance of operations vs projects aspect of strategic management.
We believe that most companies can better formulate and manage their strategy, and extract a higher yield from their investments in operations and projects. By borrowing concepts from the investment management sector.
This requires a more dynamic allocation of resources between operations and projects. For some companies, it may require a fairly high degree of change in the way they operate.
Valuation and risk
A company valuation depends on the expected future cash flows, generated by existing operations – and future operations (projects). Therefore, a company value could increase by allocating more of its capital to projects, if the project portfolio offers a higher risk-adjusted return, relative to existing operations.
Regularly, say one to three years, each existing business unit (or revenue stream) within a company should (re)justify its case, against potential new businesses (projects).
To work, this requires a multiple scenario-based valuation, with a robust risk assessment system. Particularly, at the project/ business portfolio level. It is easy to understate the riskiness of new business ventures. Especially, big ones.
In some cases, folding (or selling) a poor-performing business unit and redeploying the capital to start a brand new one may be the least risky option!
Exchange-listed companies should test this option with communications to financial analysts, as well as the wider investing community. And see the reaction, before they go ahead with it. Private companies should seek advice from trusted advisors.
If focusing on value (as opposed to profitability) sounds odd to you, think of technology companies. These are not making money and yet they are being valued in millions or even billions of USD, GBP or EUR. Think of Tesla and Uber in the US and Funding Circle in the UK. They may be “unicorns” with, arguably, rather optimistic valuations, but the logic is perfectly rational.
This principle is true for every company. The earlier the stage of a company, the truer the principle is. A caveat: change should be planned considering the strengths of your organisation, its mission and values.
To learn more about project and portfolio financials, please read the previous post. Or attend the following event:
(If you are not a PMI member, please contact us ASAP as we may still be able to secure a place for you, at no cost.)