Page 181 - DMGT553_RETAIL_STORE_MANAGEMENT

Retail Store Management

Notes
!
Caution Planning such expenditures involves weighing expert technical opinion against
financial appraisal and risk assessment (especially critical when a project has no precedent).

Given these considerations, it’s not surprising that the planning and execution of large-scale
projects often go spectacularly wrong from the earliest stages—a sure sign that the capital
expense planning process is flawed. Take the 2008 Beijing and 2012 London Olympics: Both
projects have been dogged by budget revisions on a massive scale. And they’re not alone:
Countries around the world can point to public and private sector projects that have exceeded
their budgets. Overruns, it seems, go hand in hand with project complexity and scale.

An Expert’s View of the Challenge

The Private Finance Initiative (PFI) describes a partnership between the private and public
sectors in which the risks and rewards of financing long-term developments are transferred to
the private sector. In most cases, this means that the private sector companies are responsible for
building assets on behalf of local and central governments via commercially available funding,
providing facilities management services, and maintaining the assets over their working lives.
Such projects are generally large in scale and can often span 20 to 25 years.

Did u know? According to Glenn McCauley, head of PFI Consulting for Deloitte Consulting,
such projects generally involve an element of “crystal ball gazing.”
After all, applying decisions over such a long time frame is a process riddled with uncertainty,
because it involves choices about not only an asset’s development, but also about the services
required to maintain that asset over the long term. Says McCauley, “The shape of future services
may be difficult to define, and the public sector often finds it difficult to specify what it wants
over the long term.” Adding to these difficulties is the fact that long-term public sector plans are
susceptible to changes in policy. Citing one example, McCauley says, “Many authorities are
investing heavily in waste management programs and facilities for treating household waste;
however, a change in government policy with regard to something like biodegradable packaging
could change the overall demand for individual types of treatment facilities overnight.”

What this means is that in the capital expenditure planning phases, all those involved must
consider a number of options, and any arrangement that’s decided upon must be flexible enough
to adapt to change. Says McCauley, “You have to consider the long-term risks and the effect they
may have on construction costs as well as the likely changes in services and their effect on costs.”
According to McCauley, though, organizational impacts add the biggest risk during the planning
phase. “It is the cost inputs suggested by technical advisors and experts,” he says, “that create the
biggest sensitivities in the project plan. An inefficient financing structure is going to have much
less of an impact than flawed assumptions about costs. Evidence shows that for large-scale
construction projects, it’s the cost of building things that’s important. There has to be a robust
and transparent process for really scrutinizing the initial costs input.”

Promoting Multidisciplinary Engagement

Major capital expenditures—that is, projects with contract values measured in the tens of
millions—almost always span a range of functional expertise. With large-scale construction
projects, for example, architects, engineers, and scientists can all be expected to have input in the
planning and budgeting process, as can marketers and commercial management staff, who will

176 LOVELY PROFESSIONAL UNIVERSITY