Capital Allocation & Portfolio Optimization: What McKinsey, BCG, Deloitte, Bain, and EY Say About Making Better Investment Decisions

Why is it not enough to evaluate investment projects individually? And how can you generate more economic value with an existing CAPEX budget?

International strategy consultancies have been addressing these questions for years. McKinsey, Boston Consulting Group (BCG), Deloitte, and EY publish white papers on capital allocation, capital productivity, scenario planning, and portfolio optimization.

Their publications make it clear: The economic quality of an investment decision does not depend solely on the profitability of individual projects. It is also crucial how companies allocate their available capital across competing investment opportunities.

Mathematical optimization expands this perspective to include an additional question: Which combination of projects yields the highest economic benefit under real-world budget, resource, and dependency constraints?

This article analyzes the published positions of leading consulting firms, explains the scientific foundations of portfolio optimization, and highlights the implications for CFOs, board members, and investment decision-makers.

1. What does capital allocation mean?

Capital allocation refers to the strategic and operational distribution of available financial resources among competing uses.

These include, for example:

• Investments in new production facilities,
• modernization of existing facilities,
• research and development,
• digitization and transformation projects,
• real estate and infrastructure investments,
• acquisitions and strategic growth initiatives.

Each of these investments requires capital. In addition, projects often compete for personnel, technical capacity, time slots, and organizational resources.

The economic goal, therefore, is not necessarily to finance as many projects as possible. Rather, the available capital should be deployed in a way that maximizes its contribution to the corporate strategy and value creation.

Capital allocation is thus not merely a budgeting task. It is a strategic portfolio decision.

2. McKinsey: Capital Productivity and Dynamic Investment Management

CAPEX Management as a Lever for Corporate Performance

In its article “How capital expenditure management can drive performance,” McKinsey discusses improving capital productivity across the entire lifecycle of investment projects.

Among other key areas of focus, McKinsey identifies capital strategy and portfolio optimization, the development of more economically viable projects, and their more efficient implementation.

The article describes significant savings potential when applying relevant best practices. This potential relates to comprehensive improvements in CAPEX management and should not be equated with a guaranteed increase in returns through portfolio optimization.

Nevertheless, the fundamental insight is crucial: Managing the entire investment portfolio influences a company’s economic performance.

McKinsey: Capital Allocation as a Dynamic Model

In the article “Why the Future of Capital Projects Belongs to Digital and AI-Enabled Teams,” McKinsey describes the evolution of investment management through digital technologies and artificial intelligence.

Investment portfolios should no longer be managed exclusively through periodic planning and approval processes. Instead, the focus is shifting to a dynamic model that continuously takes into account new information, changing risks, and alternative investment strategies.

This creates a new perspective for corporate leadership:

It is not just the initial investment decision that matters. It is also crucial to determine whether the chosen capital allocation remains economically sound under changing conditions.

3. BCG: Capital Allocation as a Core Strategic Task

In its publication “The Art of Capital Allocation,” the Boston Consulting Group examines the role of capital allocation in the implementation of corporate strategies.

BCG views capital allocation as a crucial mechanism for translating strategic priorities into concrete investments.

It is not enough for each business segment or department to propose economically sound projects in isolation.

The central challenge lies in deploying limited capital across the entire organization in a way that maximizes value creation.

The Problem with Decentralized Investment Decisions

In many companies, investment proposals arise in a decentralized manner:

• Production sites request modernization budgets.
• Business units develop growth projects.
• Functional departments prioritize their own initiatives.
• Finance departments consolidate the requests.
• The executive board makes decisions within the available budget.

This approach fosters organizational accountability. However, it does not automatically answer the question of whether the sum of the approved individual decisions results in the economically optimal overall portfolio.

From the perspective of portfolio optimization, therefore, the impact of the entire combination of investments must be considered.

4. Deloitte: Optimal Portfolio Combinations Under Constraints

Deloitte addresses the mathematical dimension of capital allocation in particular detail.

In the publication “Creating a Risk-Intelligent Enterprise: Portfolio Optimization,” Deloitte describes an approach in which enterprise value, risks, operational constraints, and investment alternatives are modeled together.

The analysis takes into account, among other things, financial and operational data, external factors, and various economic scenarios.

The goal is to analyze portfolios under various conditions and enable well-informed capital allocation decisions.

Portfolio Optimization Instead of Isolated Project Evaluation

This approach is also described on Deloitte’s official page “Capital Allocation and Portfolio Optimization.”

Deloitte explains there that scenario modeling and multi-criteria analysis can be used, taking business rules and constraints into account, to identify optimal portfolio combinations.

This highlights a fundamental difference:

The economically best investment decision does not necessarily consist of the individually highest-rated projects. It may result from a different combination that better aligns budget, risks, resources, and strategic goals.

The Importance of Constraints

In practice, investment decisions are constrained by numerous conditions:

• Maximum annual CAPEX budget
• Multi-year funding limits
• Available staff and technical capacity
• Technical and organizational project dependencies
• Legally or strategically mandated projects
• Risk limits and diversification requirements
• Project durations and implementation windows

A portfolio is only a realistic decision-making alternative if it meets these requirements.

This is precisely where the connection between strategic capital allocation and operations research lies.

5. EY: Strategic Capital Allocation and Scenario Analysis

EY-Parthenon addresses this topic on its “Capital Allocation Services” page .

The focus is on aligning capital deployment with corporate objectives, analyzing existing portfolios, and using scenario models to support investment decisions.

Among other things, EY asks whether capital is appropriately allocated across projects and business units and whether investment decisions are based on robust data and assumptions.

In doing so, EY combines the traditional financial perspective with strategic decision-making quality.

From Financial Analysis to Actionable Recommendations

Financial Planning & Analysis (FP&A) provides budgets, forecasts, and scenarios. This information is indispensable.

However, knowing different scenarios does not automatically answer the question of which specific combination of investments should be chosen.

This is where mathematical optimization comes in: It uses financial forecasts as input variables and calculates viable portfolios based on a defined economic or strategic objective function.

6. What the Publications Have in Common

Although the consulting firms have different areas of focus, several common themes can be identified in the publications examined.

The common economic question is:

How can existing capital be deployed to generate the greatest possible value?

However, these publications do not constitute a joint recommendation for a specific software product or optimization method. Rather, they demonstrate that capital allocation and portfolio optimization are established topics in strategic corporate management.

7. Why Project Prioritization Alone Is Not Enough

Many companies evaluate investment projects based on net present value, ROI, payback period, risk, or strategic relevance.

The projects are then prioritized and selected within the available budget.

While this approach is understandable, it does not always result in the economically optimal overall portfolio.

A simplified example

A company has an investment budget of 10 million euros and is evaluating three projects.

Prioritizing based on absolute net present value would place Project A first.

If Project A is selected, two million euros remain in the budget. Projects B and C cannot be financed additionally.

The portfolio thus achieves a net present value of five million euros.

In contrast, the combination of Project B and Project C uses the entire budget of 10 million euros and generates a combined net present value of 7 million euros.

Result: The combination of B and C achieves a net present value 40 percent higher than Project A alone.

This example is a simplified model calculation. It assumes independent projects, additive net present values, and a single budget limit. In real-world portfolios, additional constraints and interactions may apply.

Nevertheless, it illustrates a fundamental principle: Selecting the most attractive individual project is not the same as selecting the optimal portfolio.

8. Mathematical Foundations of Portfolio Optimization

The selection of investment projects under budget constraints can be formulated as a binary optimization problem.

A decision variable is defined for each project:

x_i ∈ {0,1}

Where:

• x_i = 1: Project i is selected.
• x_i = 0: Project i is not selected.

Objective Function

For independent projects with additive net present values, the objective function could, for example, be:

Maximize Z = Σ NPV_i · x_i

The objective is to maximize the total net present value of the selected projects.

Budget Constraint

The available capital limits the selection:

Σ CAPEX_i · x_i ≤ B

Here, B denotes the available investment budget.

Additional Constraints

In addition, the following conditions, among others, can be modeled:

• Dependencies: A project may only be selected if another project is also implemented.
• Mutual exclusion: Two alternative projects may not be selected at the same time.
• Mandatory projects: Certain projects must be implemented regardless of their economic evaluation.
• Resources: The total required capacity must not exceed available limits.
• Multi-period planning: Budget and resource constraints apply separately across multiple planning periods.

Why the Calculation Becomes Challenging

For N binary project decisions, there are fundamentally 2^N possible selection combinations.

Even with just 100 projects, this amounts to approximately 1.27 × 10^30 combinations.

Constraints rule out many of these combinations. Nevertheless, the search for an optimal solution can be mathematically challenging.

Operations Research provides established methods for this purpose, including integer linear optimization, mixed-integer programming, and other exact or approximate solution approaches.

Which methods are suitable depends on the specific model structure, the constraints, the problem size, and the requirements for solution quality.

The global optimum is not merely a management assumption, but a mathematically definable property of a solution. Whether its global optimality can be proven, however, depends on the model used, the solution method, and the proof of optimality achieved.

9. From Annual CAPEX Planning to Real-Time Decision-Making in the Boardroom

Traditional investment planning often follows a sequential process.

1. Business units submit investment projects.
2. Controlling and FP&A review profitability and budget.
3. Projects are evaluated and prioritized.
4. Management and the executive board discuss alternatives.
5. The available budget is allocated to selected projects.

If the framework conditions change during an Executive Board meeting, a new portfolio calculation may be necessary.

For example:

• The CAPEX budget is reduced by 15 percent.
• A strategic project becomes mandatory.
• A location receives additional investment funds.
• A major project is postponed by one year.
• A bottleneck in technical resources arises.

With a mathematically supported decision-making framework, such changes can be captured as new constraints or parameters.

The optimization model then calculates a new permissible project combination.

This changes the role of the boardroom: Instead of merely approving prepared portfolio proposals, decision-makers can directly compare alternative capital allocations.

From Reporting to the Decision Loop

Such a decision-making process involves four steps:

1. Question: Which strategic or financial assumption should be changed?
2. Calculate: Which project combination best meets the new conditions?
3. Compare: What are the economic implications compared to the current portfolio?
4. Decide: Which alternative is approved, taking all relevant factors into account?

The mathematical calculation supports corporate management. It does not replace strategic judgment, governance, or the responsibility of the executive board.

10. Practical Example: Portfolio Optimization in the Real Estate Sector

One application of mAInthink involves the Klybeck real estate development project in Basel.

For the portfolio configuration analyzed, a change in the combination of the projects under consideration—while maintaining the same budget—resulted in a calculated improvement in the reported return from 7.0 percent to 11.4 percent.

This corresponds to:

• an absolute improvement of 4.4 percentage points,
• a relative increase in return of approximately 62.9 percent,
• additional economic potential of approximately 30 million Swiss francs, according to the case study.

This case illustrates how a different combination of projects can achieve a higher modeled economic benefit while maintaining the same budget.

Important: The figures cited describe the results of this specific model calculation. They do not constitute a general guarantee of return nor proof of an increase in value that has already been realized.

11. Operational Implementation with StratePlan

Publications by international consulting firms address capital allocation and portfolio optimization from strategic, organizational, and analytical perspectives.

Practical implementation, however, also requires a mathematical model, appropriate data, and a method for calculating viable investment combinations.

This is where StratePlan from mAInthink comes in.

StratePlan is a solution for the mathematical optimization of investment and project portfolios. The technology takes into account defined economic targets as well as budget, resource, and dependency constraints.

From the project list to the calculated capital allocation

A company can use existing project information as the basis for optimization, for example:

• Project identification
• Investment volume
• Net present value or other objectives
• Strategic allocations
• Project dependencies
• Budget and Resource Limits

On this basis, alternative investment portfolios can be analyzed mathematically.

The results can serve as a basis for decision-making by CFOs, investment committees, and executive boards.

CAPEX Live Simulation

A specific use case is the recalculation of portfolios during an executive board meeting.

If decision-makers change the budget or individual constraints, StratePlan can re-optimize the project mix based on the new conditions.

The actual calculation time depends on the size and complexity of the optimization problem in question.

The benefit lies not only in speed. What’s crucial is the ability to make the economic consequences of different decisions immediately visible and comparable.

Same Budget. Better Combinations. Greater Impact.

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12. Conclusion: Capital Allocation Is Becoming a Predictable Management Discipline

The studies published by McKinsey, BCG, Deloitte, and EY make it clear that the systematic improvement of capital allocation is a central task of corporate management.

They highlight different approaches to aligning investment decisions more closely with value creation, strategic goals, risks, and real-world constraints.

Mathematical portfolio optimization expands on these approaches by systematically seeking the best permissible combination of investment projects.

This shifts the central management question:

Instead of asking solely which individual projects are economically attractive, the focus shifts to determining which combination of all available projects yields the greatest benefit under the given conditions.

The next stage of development involves applying this calculation not only in the annual planning process but also when conditions change and directly within the decision-making body.

The future of capital allocation lies not solely in better forecasts, but in better, mathematically verifiable decisions.

13. Frequently Asked Questions About Capital Allocation and Portfolio Optimization

14. Original Publications and Additional Sources

The following original sources form the basis of the technical analysis. They include various types of publications, such as academic articles, PDF publications, and official consulting descriptions.

1. McKinsey & Company: How capital expenditure management can drive performance.
2. McKinsey & Company: Why the Future of Capital Projects Belongs to Digital and AI-Enabled Teams.
3. Boston Consulting Group: The Art of Capital Allocation.
4. Deloitte: Creating a Risk-Intelligent Enterprise: Portfolio Optimization.
5. Deloitte UK: Capital Allocation and Portfolio Optimization.
6. EY-Parthenon: Capital Allocation Services.

Editor’s Note: This article is an independent expert analysis by mAInthink. The consulting firms mentioned are not designated partners or supporters of mAInthink or StratePlan. The analysis and conclusions in this article are provided by mAInthink.

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