Capital Acquisitions - Another Role for Interim Managers
Recent experience with a client has brought another area into focus where the role of the interim manager provides a good fit with the needs of small and medium-sized enterprises. As with my client, many business owners are looking at the need to replace, upgrade or add equipment in an effort to enhance labour productivity, control costs, improve quality or expand marketing opportunities. With the Canadian dollar providing a consistently strong exchange rate and interest rates remaining low, many businesses realize this is a good time to invest.
That being said, the decision to undertake new equipment investment is fraught with uncertainty. Is this the right machine? Will I get the results I’m looking for? Can I afford to do this? Can I afford not to do this? Is it a good time to take on more debt? Where’s the payoff? Laying out large capital expenditures for equipment purchases is often very uncomfortable for small and medium-sized businesses, many of which lack the required expertise and experience among their small management staffs to provide appropriate decision support in this situation. Nor is it a wise move for companies in this bracket to add to company overhead by recruiting and retaining a full-time executive to deal with these often widely separated, albeit crucial, investment decisions.
In these circumstances, an interim manager with a strong operations management background can provide the analytical framework to help to deal with all the uncertainties and assist the management team to approach the investment decision with a higher degree of confidence.
The interim executive’s first task with such an assignment is to lead the management team in building the business case for the equipment investment. This should lead to a clear understanding of the purpose of the capital expenditure and a set of quantitative objectives for performance.
Next, the alternatives must be identified. At this stage, we are not talking about comparing machine A to machine B to machine C, but investigating the higher level decisions. If there are different technologies available to achieve the same performance objectives, this is the time to look at them. Also, the issue of attainment versus cost should be explored – could a machine that only delivers, say, 75% of the desired improvements, but at a significantly lower cost, be an economically better choice than a more expensive machine that will ensure near 100% attainment? If cash flow is a dominant concern for this company, perhaps the lease versus buy option should be analysed.
A benefit:cost analysis of the major alternatives is essential. The integration of benefit:cost analysis into multiyear operational performance projections allows future company growth and change to be taken into account and generates key metrics like pay off period and return on investment over the depreciated life of the equipment. The interim manager can provide a dispassionate, quantitative framework for comparison and consideration of alternative courses of action by the client’s management team.
When the management team is comfortable with its decisions, the interim manager can help to identify qualified suppliers and activate an RFQ process that will ensure that the client gets the best available value for dollar when making the capital purchase.
Why would the owner or CEO of a small to medium-sized business engage an interim executive to assist with a capital expenditure that might only be in the $50,000 to $150,000 range? Sometimes decision by consensus, not analysis, will dominate and money will be invested in unneeded, inappropriate or just plain wrong equipment. On the other hand, the stress of decision making in the face of multiple uncertainties may encourage company management to avoid decisions and forego years of significant benefits that could have really improved company performance. These two extremes are to be avoided if small to medium-sized business management teams are expected to manage growth and control the business.
An experienced interim executive might spend 30 to 40 hours, probably spread over a period of a couple of months, to organize and lead a rational decision making process on capital expenditure. Even for a small capital project, this represents a small expense relative to the investment cost. By enabling the management team to proceed with confidence, to reach the right decision, this small expenditure will pay off promptly for the client.
Managing Principal – British Columbia