The noisiest business unit should not receive the most CAPEX

Capital allocation should not be determined by organisational policy, but by a defined decision-making logic.

BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.

The CAPEX round begins.

Business Unit A presents its projects.

20 slides.

Strong arguments.

A clear growth story.

The divisional head is present at the meeting himself.

Business Unit B follows.

Fewer slides.

Less presence.

Less management attention.

But possibly the better investment opportunities.

In the end, both are competing for the same capital.

And this raises an uncomfortable question:

Is it the quality of the investment that matters – or the strength of its internal representation?

The loudest business unit shouldn’t get the most CAPEX.

Companies are not mathematical systems.

They consist of people.

Of responsibilities.

Of hierarchies.

Of experience.

Based on interests.

Based on differing levels of information.

And sometimes also based on internal assertiveness.

That is normal.

It only becomes problematic when these factors influence capital allocation more strongly than the defined corporate objectives.

CAPEX should not be channelled to where a project is championed most vocally.

It should be channelled towards the project combination that best serves the organisation as a whole.

A good pitch does not necessarily make for a good investment

Some projects make for excellent presentations.

They are high-profile.

They are new.

They have a compelling narrative.

They align with current management priorities.

Perhaps they are even directly backed by an influential executive.

Other projects are less spectacular.

An automation project.

A technical modernisation.

A process improvement.

An infrastructure investment.

A project that hardly anyone outside the specialist department is aware of.

But it may well be that this very project generates a greater economic or strategic contribution within the overall portfolio.

Presentation quality and investment quality are not the same thing.

Capital allocation is subject to human factors

One business unit may have been particularly important historically.

Another may be strongly supported by the CEO.

One divisional head may be exceptionally persuasive in their presentation.

Another may present their case more cautiously.

Some projects already enjoy high internal visibility.

Others arise far removed from the group headquarters.

Some investments have strong sponsors.

Others have nothing more than a sound business case.

These differences do not disappear simply because a company has a formal CAPEX process.

The problem is not politics. The problem is unclear rules.

Organisational interests cannot be completely removed from management decisions.

And that would be unrealistic anyway.

Business units should represent their

perspectives.

Managers should make the case for their projects.

Specialist departments should highlight risks and opportunities.

The Executive Board should discuss these

matters

.

The crucial question is therefore not:

‘How do we eliminate human influence?’

But rather:

‘How do we prevent human influence from replacing the collective decision-making logic?’

The rules should be established before the pitch

What are the company’s objectives?

What financial criteria apply?

What strategic criteria apply?

What are the budget constraints?

Which resources are in short supply?

What dependencies must be taken into account?

Which projects are mandatory?

What risks are taken into account?

Which assumptions must all business units apply using the same logic?

The more clearly these rules are defined before the decision is made, the more difficult it becomes to replace them with organisational policy during the decision-making process.

From the best presentation to the best combination

Let’s imagine 200 investment projects.

They come from six business units.

Together, they require:

EUR 850 million in CAPEX.

EUR

:

500 million

is available

.

A demand of EUR 350 million cannot be financed.

Now, each business unit could try to push through as much of its own project portfolio as possible.

But from the perspective of the company as a whole, that is the wrong basis for decision-making.

It is not a question of which business unit wins.

It is a question of which combination of all 200 projects produces the best overall portfolio under the defined conditions.

Business Unit A may have excellent projects

Perhaps Business Unit A is requesting 180 million euros.

Almost every project has a positive business case.

The division is growing.

Management is convinced.

The presentation is excellent.

But that still doesn’t answer the crucial question:

Is this 180 million euros the best use of the company’s capital when compared with all other available investment opportunities?

The business unit cannot answer this question on its own.

To do so, the entire portfolio must be considered.

Business Unit B may lose out, even though its projects are sound

This is one of the most challenging aspects of capital allocation.

A rejected project need not be a bad project.

It may be profitable.

Strategically sound.

It may appear operationally necessary.

And yet still not form part of the selected project mix.

Why?

Because capital is scarce.

Because resources are scarce.

Because alternatives exist.

Because projects interact with one another.

Capital allocation does not distinguish between good and bad projects.

It often distinguishes between good projects and better combinations.

This changes the internal discussion

Without a shared decision-making logic

the discussion might go like this:

“Why does Business Unit A get more budget than us?”

With a shared decision-making framework

the question might be phrased differently:

“Which projects from Business Unit A generate a higher contribution within the overall portfolio – and why?”

This is a fundamental difference.

The first question concerns power and distribution.

The second discusses capital allocation.

Same Rules. Different Projects.

A defined decision architecture does not mean that all projects are the same.

It means that different projects are considered within a common decision-making framework.

A production project may have different characteristics to an IT project.

A growth project may differ from a maintenance investment.

A regulatory compliance project differs from a product innovation.

Nevertheless, it must be possible to consistently take their impact on the overall portfolio into account.

The same rules do not mean the same projects.

They mean a common decision-making logic.

Strategic relevance must not be the result of negotiation

When capital becomes scarce, almost any project can suddenly be labelled as strategic.

That is why ‘strategic’ should not merely be an argument in the investment committee.

Management should define in advance:

What does growth mean?

What does resilience mean?

What does digitalisation mean?

What does productivity mean?

What does innovation mean?

Which of these criteria are relevant?

How are they operationalised?

And what is their priority?

Strategic criteria should form part of the decision architecture – not part of negotiation tactics.

The business case also requires common rules

The same applies to financial assumptions.

If one business unit adopts a conservative approach and another an optimistic one, distortions arise.

If different time horizons are used, comparability is reduced.

The same applies if risks are priced differently.

If internal resources are taken into account in one project but not in another, the comparison can become problematic.

A mathematical portfolio can only be as consistent as the underlying data and valuation logic.

Mathematics knows no hierarchy

A mathematical optimisation model does not know who gave the presentation.

It does not know which business unit has historically been particularly powerful.

It does not know which project the CEO personally finds interesting.

It does not know which divisional head argues particularly persuasively.

It is aware of:

projects.

capital

requirements.

defined targets.

resources.

dependencies.

constraints.

And the decision-making logic prescribed by management.

Mathematics has no organisational policy.

But it adopts the assumptions that people feed into the model.

That is

why an algorithm does not automatically resolve policy issues

This is an important limitation.

If a business unit systematically overestimates its project data, mathematics will not automatically detect this governance issue.

Nor will it if criteria are deliberately interpreted differently.

If a project is defined as mandatory without any objective basis, the model will treat this requirement in accordance with its modelling.

Mathematics can apply a common decision-making logic.

It cannot replace poor governance with sound mathematics.

Governance comes before optimisation

Who is authorised to enter project data?

Who validates it?

Who defines strategic criteria?

Who sets the weightings?

Who defines constraints?

Who is authorised to mark a project as mandatory?

Who changes assumptions?

Who decides on exceptions?

And who approves the final portfolio?

These questions form part of a professional decision architecture.

The CFO should ask an uncomfortable question

The current portfolio is on the table.

500 million euros in CAPEX.

Six business units.

The CFO asks:

“What would change if we removed the names of the business units from all projects?”

No logos.

No department names.

No hierarchy.

No historical budgets.

Only:

capital

requirements.

value

contribution.

strategic criteria.

resources.

dependencies.

constraints.

Would the same portfolio emerge?

That’s an interesting boardroom question.

The Blind Portfolio Test

Conceptually, a simple test can be derived from this.

Scenario A: ORGANISATIONAL PORTFOLIO

Existing business unit budgets, organisational boundaries and defined governance structures remain in place.

Scenario B: ENTERPRISE PORTFOLIO

Investment

opportunities are considered company-wide within a shared capital framework, where this makes sense from an organisational and modelling perspective.

Both scenarios are then compared.

Which projects change?

How much capital shifts?

Which business units receive more?

Which ones are receiving less?

How is the expected portfolio value changing?

Which strategic objectives are being supported differently?

Which resources are becoming a bottleneck?

The difference highlights the impact of organisational capital constraints.

This does not mean that business units are unimportant

On the contrary.

Business units possess information that a central body often cannot fully access.

They know the markets.

Customers.

Technologies.

Competitors.

Local risks.

Operational realities.

This information is essential.

But information and decision-making authority are not the same as an automatic entitlement to capital.

The business unit provides the opportunity

The company provides the capital.

The business unit presents an investment opportunity.

With an expected value contribution.

With strategic relevance.

With capital requirements.

With resource requirements.

With risks.

Involving dependencies.

This opportunity then competes with other investment opportunities within the defined rules.

This is how budget negotiations become capital allocation.

The loudest department may still be right

That, too, is part of the truth.

Perhaps the loudest business unit does indeed have the best investment opportunities.

Perhaps it should even receive more capital.

Quantitative decision-making logic must therefore not be used to prevent a particular outcome.

It should answer a different question:

“Can the capital allocation be clearly derived from the defined objectives, data and constraints?”

If the answer is yes, it is irrelevant whether the business unit was ‘loud’ or ‘quiet’.

And the quietest area may hold the best opportunity

Perhaps there is a project somewhere in the company that receives hardly any management attention.

It only requires 8 million euros.

It is not spectacular.

It has no prominent sponsor.

But it eliminates a critical bottleneck.

This makes three further projects possible.

Together, they generate significant additional portfolio value.

In a portfolio, a small project can have a major impact.

This is precisely why a project’s visibility should not be the sole factor determining its importance.

From HiPPO to Decision Intelligence

In decision-making processes, there is occasionally talk of the so-called HiPPO effect:

Highest Paid Person’s Opinion.

The idea behind it is simple:

In hierarchical organisations, the opinions of particularly influential individuals can have a significant impact on decisions.

When it comes to CAPEX decisions, management experience should, of course

,

play an important role.

But experience becomes more valuable when it can be discussed on the basis of a transparent decision-making framework.

Decision Intelligence does not mean eliminating management judgement.

It means supporting management judgement with an explicit, traceable decision-making logic.

Now comes the boardroom simulation

The current portfolio has been calculated.

The CEO asks:

“What happens if we remove the business unit budget limits?”

New calculation.

The CFO asks:

“What happens if 20 per cent of capital competes freely across the company?”

New calculation.

Strategy asks:

“What happens if growth is given greater weighting?”

New calculation.

The COO says:

“But engineering remains limited to its current capacity.”

Constraint remains in place.

New calculation.

It is now clear which portfolio changes actually result from which assumptions.

Question. Calculate. Compare. Decide.

Decision Logic does not create a conflict-free boardroom

Nor should that be the aim.

A board must discuss.

Different perspectives are valuable.

Strategy is not conflict-free.

Capital allocation is not conflict-free.

Trade-offs are not free from conflict.

The purpose of decision architecture is not to eliminate discussion.

It is intended to ensure that discussions are based on the same assumptions, data and consequences.

Transparency changes organisational policy

When it is clear why a project is part of the portfolio, the discussion changes.

The same applies when it is clear which alternative has been ruled out.

The same applies when it is clear which constraint excludes a project.

When different scenarios can be compared using the same rules, the decision-making logic becomes more transparent.

Transparency does not eliminate vested interests.

It makes their influence more visible.

StratePlan: A common mathematical framework

StratePlan can analyse investment projects from different business units within a single decision-making model.

Capital requirements, expected economic contributions, strategic criteria, resources, dependencies and other quantifiable constraints can all be taken into account together.

This allows different capital allocation and governance scenarios to be compared with one another.

However, StratePlan does not decide which business unit is ‘right’.

It does not evaluate organisational policy.

Nor does it replace management decisions.

Management defines the rules.

The organisation provides the data and investment opportunities.

The maths calculates the portfolio alternatives within these rules.

The board decides.

The loudest business unit shouldn’t get the most CAPEX.

It shouldn’t be the loudest business unit that wins.

Nor the quietest.

Nor automatically the largest.

Nor automatically the historically most important.

Nor is it automatically the area with the highest individual ROI.

The crucial question is:

Which combination of available investments generates the best overall portfolio given our strategic objectives and real-world constraints?

If Business Unit A receives more capital as a result, it should be clear why.

If Business Unit B receives less, the same applies.

If Business Unit C is not funded despite having an excellent project, the alternative that is being displaced should be made clear.

That is the difference between budget policy and capital allocation.

The business units contribute their perspective.

Management defines the decision-making logic.

The maths calculates the consequences.

The Executive Board decides on the capital of the entire company.

LESS POLITICS. MORE DECISION LOGIC.

DON’T TRUST US. CALCULATE IT.