The Logic of Capital Development
20th century capital development is not integrated with the business
20th century management provides no business framework for capital development, particularly for new solutions that must be integrated with the business. Most capital is not recorded as capital. Much capital is considered as “intangible assets” and is ignored. There is no direct management of capital developed to provide the return on capital development investments. Capital is developed as a fixed asset or simply as a project outcome.
Most development is performed as an ad-hoc project, and managed as an isolated undertaking to implement new structures and solutions over the business. This makes it difficult to manage the relationship between the project and the business, gain business user acceptance of new solutions implemented, and plan and measure return on the capital development investment. A previous post in this series discussed the Logic of Business Change, which provides some background.
Capital is developed and utilized to produce business results
The purpose of enterprise capital is to provide the performance solutions needed by the business to produce value in business results. Capital includes business, human, facility, and management capital utilized by the business. The need for capital development must arise from the business in the need to produce higher value results or to produce new results. Capital to be developed must not just be one lump sum asset, process, or system. Capital must be defined as the range of specific performance solutions needed to produce a high value and high quality result for each new or improved result. The development cost for each performance solution and continuing operating costs must be planned. The added value-added to the result must be itemized to provide the return of investment over the payback period.
Capital development projects must have their own business structure to manage the capital assigned to the project to produce new enterprise results and performance solutions as project results. The development costs and documentation for new results and new performance solutions must be captured as project results. New performance solutions are implemented to produce new or improved results. The added value-added is recorded to substantiate the return on investment.
The business must be organized to provide the framework for capital development
Previous posts in this series discussed the Logic of Business Organization to produce one integrated business structure for 21st Century Management, composed of the results to be produced by the business and the performance solutions utilized by the business. This business structure provides the basis for capital development. New results are needed to augment the structure and existing result must be improved or replaced. The result value-added (result value – total performance costs) can be projected into the future, if there is no capital development. Eventually the performance cost will exceed the result value giving a negative result value-added.
Capital development is required to improve existing performance solutions or to develop new solutions to increase the value of results. A new post-project business structure can be planned to show the business after the implementation of new results and performance solutions. The new or improved results must increase in value to justify the capital investment. The capital development incurs costs to develop or acquire new performance solutions. The investment is justified by the added result value-added; the result value-added with investment less the result value-added with no investment over the payback period.
Result managers are involved in the development project to provide requirements, test solutions, and utilize solutions successfully for new results. Prior to development, result managers must accept new result goals to increase the value of results after new solutions are implemented.
Performance managers responsible for new solutions understand result requirements for all the new and improved results that will utilize new solutions and can develop solution specifications. Performance managers accept new performance expectations for the new solutions in operation. Management Consultants may be asked to assist in the project, but the requirements and specifications must be developed by the respective enterprise managers.
The capital development project must have its own business structure to be properly managed
The capital development project is a sub-business under the enterprise investment management result for the project. The project must have it own business structure that structures the new results and performance solutions to be produced as project results. The internal and external capital resources and capital expenditures to be utilized on the project are organized in the project performance structure. The project is organized when solutions are deployed to produce specific results. The utilization of solutions is managed to produce project results. Development costs are captured as in any structured business using 21st Century Management. The development costs are associated with specific performance solutions to know development costs to be amortized. All new results and performance solutions are fully documented to be implemented in to the actual post-project enterprise business structure.
New performance solutions must be utilized to produce new results in operation
Results and performance solutions are implemented into the post-project enterprise business structure. Result managers must utilize new performance solutions to achieve new result goals and gain the return on the capital development investment. Performance managers must provide and support solutions that meet performance expectations. Added result-value added is captured as a by-product of business processing and compared to the planned added value-added, to evaluate the project and to manage the actual utilization of solutions to produce results. Result symptoms and problems with new solutions must be identified soon to strengthen solutions, where needed.
Capital development requires 21st Century Management
Capital cannot be properly developed with 20th century management, other than for large physical facilities that have little business involvement. There is no business framework or definition to define specific results to improve and solutions to develop. It is difficult to integrate operations and development for the proper result requirements and goals and performance specifications and expectations prior to development and to plan the return on investment. The project is often managed by consultants with little enterprise involvement. The objective is often implementation of a proscribed solution under the assumption that business will be improved. Solutions are implemented and often are resisted by users, who have not had the proper preparation or project involvement. Rarely is there even an attempt to measure the actual return on investment.
Capital development requires 21st Century Management to maintain enterprise management of development, to integrate development with operations, to utilize management consultants effectively, to manage projects properly, to manage the utilization of solutions in operation to produce result value, and to measure the added result value-added return. The article “Manage Projects as Part of the Business” shows how Result-performance Management (R-pM) manages capital development in 21st Century Management.
