On a much more frequent basis, foodservice professionals need to justify capital projects as facilities age, equipment fails or customers demand new services. At the same time, the C-suite faces increased financial pressures, which result in the organization's most valuable capital projects requiring funding approval before moving forward. This combination becomes challenging for operators when, by nature, foodservice capital projects face tough scrutiny. Without a solid financial analysis detailing the return on investment (ROI), a project stands little chance for approval.
David Reeves, MBADuring my career, I have had the opportunity to justify multiple capital projects ranging from general equipment replacement to the purchase of computer software to multimillion dollar construction projects. In fact, just last year Elmhurst Memorial Healthcare opened a replacement campus, which I was fortunate to be significantly involved with from the project's inception. The organization's decision to relocate the campus resulted in the development of a new foodservice program. Fortunately, I had an outstanding management team to develop and implement this project.
As the design of this facility progressed, we faced many key decisions, such as what services to offer and equipment to purchase, as well as what new revenue-generating opportunities to enter. As a result, we needed to justify every decision, which seemed to require a perpetual return on investment analysis. Some of the considerations we had to address include whether we should self-operate or contract/lease space, identify which food delivery model was the best fit for the organization, and review labor efficiency vs. automation. While this was a new facility, the components and structure of the ROI scenarios we performed can apply to virtually any capital project. The following is what I have found to be keys to success in justifying capital projects:
Project Leader – Rarely will anyone take your idea and develop it so your initiative is essential. Of course, it is going to take considerable time, research and leadership. Many great ideas have remained ideas when a manager did not understand how to justify the project or it may have seemed too difficult. Potential for the approval of a project will be considerably improved when you are able to make a solid financial, managerial and cultural connection.
One of the primary roles of the project leader will be to bring together all of the necessary components and coordinate them during the formation of the ROI. Some of the common areas to consider are vendor representatives, facilities maintenance, information services and finance. Including the stakeholders earlier in the process develops a better understanding of the overall project and reduces the likelihood of any last minute surprises.
Organizational Goals – How will the project benefit the organization? Will it further the strategic goals of the organization? Knowing the benefit the project provides to the overall organization is essential. Once you link the project's benefits to the organizational goals, communicate that interrelationship whenever possible.
Common project objectives might be to increase revenue, decrease overall cost, replace aging or failed equipment and respond to regulatory requirements. If the project does not meet any of these objectives, you may need to widen the scope or reconsider entirely.
Capital Plan – Do you have a capital equipment replacement plan or do you wait until equipment is not repairable to request replacement? Understandably, if a major piece of equipment still operates well but is slightly past its useful life, it may make sense to prolong replacement. However, if the majority of your equipment is aging you likely need a replacement plan.
Document the age of your equipment as well as its condition, repair costs and frequency of use. Is it an essential piece of equipment, or can you work without it if it fails? When presenting the capital plan the condition of the equipment may surprise your leadership, which, at a minimum, forces the discussion. Having a replacement request denied for a 20-year-old piece of equipment that has been failing is a better outcome than having to explain why it was never projected to fail.
Which ROI Model – The simplest model is a paybackperiod that calculates the amount of time (usually in years) it will take to repay the investment. The payback period model has its application but generally is viewed with limitations, as it does not account for risk or the time value of money. Organizations differ on the definition of an acceptable payback period but, generally, most will accept anything less than three years.
Net present value (NPV) is my preferred method of calculating ROI. While more sophisticated than payback period, NPV easily calculates using Excel. NPV serves as an overall financial indicator of the value that the project adds to the organization by considering the time value of money. For example, if the cost of capital for a company is 12 percent, a project having an 8 percent return is unlikely to gain approval due to the negative NPV. Likewise, when NPV is greater than the cost of capital, the project is usually considered favorable. Ensure the finance department supports whatever model you use. Oftentimes, the finance department will have a preferred ROI method.
Your financial department can be the greatest supporter or opponent during the development of your ROI. Ask if the finance department requires a standard format. If not, ask if someone from the department can provide a previous ROI as an example to model. In addition, ask someone from the finance department to review your analysis and offer suggestions during the development phase.
Assumption Phase – One of the most intimidating aspects of an ROI can be the development of assumptions. This is when your research is critical. Outline your assumptions, ensure they are factual and include an executive summary of how you arrived at those conclusions. For example, let's say you plan to implement a new service and your research indicates that similar facilities implementing the same service experience revenue increases ranging from 7 percent to 12 percent. With Excel, you can easily model three scenarios:
- Best Case – 12 percent
- Worst Case – 7 percent
- Best Guess – 9 percent
Utilizing this modeling technique allows you to identify the degree of uncertainty in your project and you assist the decision makers in their evaluation of risk tolerance. It may be prudent to be cautious with your ROI assumptions, as they will likely damage your future credibility if you overpromise and under deliver.
Involve Others – During the development phase of your ROI, determine the key stakeholders and include them in the development. Examples of these influential individuals might be your boss, someone from finance or other members of administration. Having support during the development of your ROI will be critical as your project moves through the approval stage. You may be able to ask one of the vendors involved in the project to offer their support in developing your ROI. It is likely that they have assisted other clients, thus they can help you navigate through difficult scenarios. Vendor support has been invaluable although I caution that you need to verify that the projections are not overly optimistic and account for all essential elements.
Track Results – Once a capital project is complete, we tend to focus our efforts on new initiatives. Yet I suggest that you need to measure your results and communicate the successes or opportunities for improvement. This ensures that you are fulfilling the intent of your project and your credibility for promoting future projects will be enhanced if you are known to deliver results.
What happens if you develop your ROI and the result is that your project cannot be justified? Don't abandon the overall plan — instead consider revising. Often times, knowing what the ROI can justify and reverse engineering to fit within that scope can be very successful. In addition to saving tremendous amounts of time, you are scaling your project to the right size.
While your project is never guaranteed approval, having a project aligned with organizational goals, solid ROI, and reputation as a manager that delivers results will offer greater chances for your success.
