Minding the Corporate Checkbook by Steven R. Kursh

Author:Steven R. Kursh
Language: eng
Format: epub
Publisher: Pearson Education
Published: 2004-09-15T00:00:00+00:00

These external macro risk factors apply consistently to all of the investments made by all of the companies in an industry. The success or failure of particular investments by companies within an industry depends mainly on the business design and execution of particular companies (the execution and mitigation of risk) as they apply within the framework of the overall business environment.

Execution Risk: The next chapter covers execution in more detail, but it is useful to consider some of the primary execution-related risks here as well. Execution-related risk factors commonly fall into the categories of duration, personnel experience, buy-in and corporate culture, research and data collection, documentation, alignment and benefits, and technology.

Duration: How long an investment takes can significantly impact risk. The general rule is the longer the time period, the greater the risk involved. Duration estimates are only as good as the assumptions you use in your calculations. Duration risk is so important that many companies deliberately cut investments into small chunks with relatively short duration periods, sometimes fewer than six months. For example, several studies have found that the probability of achieving success with an IT investment is inversely related to the time. Consider, for example, the problems Hershey had implementing SAP. Delays in that effort along with other ongoing issues helped to create a situation that cost the company well over nine figures in losses.

With a short duration and, accordingly, smaller deliverables and expectations, people are generally more focused, and there is less likelihood that a major risk will impact the investment. Put somewhat differently, longer is not better.

From the perspective of day-to-day activities, you are better off using more conservative (longer) estimates; if the investment works, given your worst-case scenario, it certainly will be a success if performance beats worst-case assumptions! Duration can be a big factor throughout the investment process, for example:

The more time that passes between collecting the data and information with which you evaluate an investment and actually executing the investment, the greater the possibility that conditions will change such that they invalidate your analysis.

Length of execution is often a good proxy for the complexity of an investment, especially in technology investments.

Length of execution creates opportunities for proponents to make changes in scope and expectations.

Payback time, or how long it takes to receive the benefits from an investment, is another critical risk factor. Shorter payback times mean less risk for the investment.

Delay between decision and execution can be another factor. The more time that passes between the decision to make an investment and the start of its execution, the less you can rely on the analysis that prompted your decision in the first place.

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