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Getting to Yes (or No): Top DOs and DON’Ts of Investment Decision Making

In my last post I noted 3 ways in which I felt organisations could improve their investment decision-making.

For those looking for something a little more directional the following are the key Do’s and Don’ts that I have encountered from working with successful investment decision makers…

1                     Do agree a clearly defined process, and keep it as simple as possible. The best process is one that is simple, fast and transparent to all concerned. The process should force out the issues as objectively as possible –  laying out the financial implications of the investment (how much will it cost in cash, and what sort of cash flows can we realistically expect it to generate) in a format and language that all members of the management team can grasp so they participate fully in the discussion.

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2                     Do make it clear what it takes to have an investment approved – how much detail do people need to present, to whom and how? It is also important that all concerned know what the criteria for acceptance are, and understand these criteria thoroughly. For example if Net Present Value is a major KPI for approving a project then make sure all your managers know what this means rather than having a black hole in the conversation. For a small routine investment approval at immediate level of management may be possible. For a bigger riskier investment the degree of research and analysis and the approval level required will be higher.



3                     Do Systematically identify and address all of the risks involved as an integral part of the process. This is one of the core elements of the decision process. Organisations are usually made up of a wide range of personalities from the extremely risk averse to the gung ho “go for it” types. The best way to referee this is to get the issues out into the open and have a calm conversation about whether to take on the risks, and if so whether and how best to mitigate.


4                     Do make sure the assumptions are as realistic and as balanced as possible. An over-focus on revenue implications can lead to underestimating the importance of other key assumptions that should be systematically challenged.  Here, industry knowledge is crucial, but in addition managers can learn to ask the right questions I suggest a robust conversation involving all relevant managers to drive home the point that that the assumptions are owned by the people implementing the project..


5                     Do feedback the learning from each investment you make by revisiting projects systematically 6-12 months later to see what actually happened, and if relevant why your original assumptions were off the mark. Companies who are good at investing all have this “post investment audit” learning process in common.


6                     Do ensure that people are not motivated to play games and make unrealistic assumptions. For example if people know they will get approval by inflating the benefits of a project and will never have to answer for this, then realistically that is what many will do. Ideally the people making the assumptions are also at least partially responsible for delivering those numbers when the investment is rolled out.


7                     Don’t allow a blame culture to emerge if investments go wrong – one of the key reasons for having open cross functional debates before the investment is to face up to the risks as a team, and then take responsibility as a team.


8                     Don’t have ‘black box’ procedures where the numbers disappear into a black hole and the project sponsor does not fully understand what happens until the ‘yay’ or ‘nay’ decision comes out. Keep it as transparent as possible for all who will play a part in making the investment a success.


9                     And finally,… Don’t let finance completely dominate the process – this is more a potential issue in bigger companies where finance can over bureaucratise. Instead the finance team should partner with the operational management who will be implementing the project.

Moira Creedon is a teacher and consultant in Strategic Finance and has worked with both corporate and public sector clients worldwide helping decision makers at strategic level to understand finance and improve their ability to formulate and implement strategy. She teaches on IMI’s Diploma in ManagementDiploma in Strategy and Innovation and Senior Executive Programme.

If you are interested in learning more about how to analyse and make investment decisions IMI see IMI’s Finance for the Non-Financial Manager and the Diploma in Business Finance.

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