Capital Evaluation and the ‘Corporate Advocate 1994

Abstract:  We speak about ‘aligning AM activities with corporate goals and intentions’ - but how?  Try a ‘Corporate Advocate’?

New Capital Expenditure Projects are typically initiated within a small section of your organisation. This section will see the benefits for itself and its work, but the wider client or organisational benefits may not be so clear, nor may the wider client or organisational costs.

Some larger agencies may appoint a project sponsor, an experienced, senior member of staff, to "smooth the way" for the project's development. Teams vie for the most powerful sponsor because he will "do battle" on their behalf when it comes before the executive committee, but who does battle on behalf of the corporation itself? Who checks assumptions for relevance, figures for accuracy, or questions the analytical rigour and ensures that section goals reflect agency goals? The executive committee are generally too busy, and, as we know, when it is everybody's business, it is nobody's business, so, in the general way of things, this corporate analysis may be left undone, or not done well. What is needed is a corporate "devil's advocate”. Two years ago, ETSA (the Electricity Trust of South Australia) incorporated such a role into its capital evaluation process.

Paul Newman, Manager Corporate Finance, advises that all capital projects over $100,000 in value have to be "audited" by the Corporate Finance Department to establish (a) that the analysis is up to scratch and would withstand critical external evaluation and (b) that the project objectives are consistent with corporate objectives. Corporate Finance has to sign off on this. (The adequacy of the data is not attested to because this is dependent on specialist electrical engineering expertise, and the responsibility for this rests with the business unit making the project proposal.)

The corporate advocate looks at the projects with an eye to the effect on clients as well as on the corporation (the rate of return). Where risks are involved, the costs of "wearing the risk" are weighed against the costs of risk avoidance.)

Robert Lamp, Senior Economist, says the system would not have been possible but for the adoption of evaluation policies and the staff training carried out over the past two years (and still ongoing), targeted at the "top 100 key players" in the field. Evaluation techniques have been taught to middle-level engineers (who are expected to take the strategic view), to technical officers and to business unit accountants. It was found that the economic principles were most easily understood by those with a professional background in accounting or engineering.

Robert acts as an adviser to business units preparing evaluations, but does not carry them out for them. This would conflict with his "auditing" function. He is careful to avoid the trap of acting as a "lobbyist". Devolving the task of evaluation to field officers has freed up Corporate Finance Department resources for the audit function.

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