Rule No. 7: Manage all capital investments to gain a planned return

20^th century management cannot plan and manage investments for a specific return

20^th century enterprise management concentrates on performance and the need for performance improvement. Development planning and execution concentrates on the capital needed for performance. Investments are directed primarily at tangible assets or achieving a project outcome. Return on investments cannot be calculated, since specific capital items and business improvements are not defined. So, potential increases in sales, revenues, etc are estimated to justify the investment. Project management manages the project separate from the business as an entity in itself.

20^th century enterprise management objective is capital development without managing the capital developed

20^th century enterprise management used today supposedly manages capital development. The managed capital developed is limited to capital that is managed, primarily in assets and employees. Most other capital is not managed or is classified as intangible assets. Development costs are not captured against the specific capital items to be utilized by the business to provide the return. Costs are lumped against an asset or against the project. Capital solutions implemented are not defined for management, accounting, support, or improvement. Rarely is there any effort to measure actual return on investment. If there is, it is estimates of actual return compared to estimated planned return.

Rule No. 7 of 21^st century business management: Manage all capital investments to gain a planned return

Capital development is the cost side of enterprise development. The benefit side is in result development. Results to be improved or enabled by development must be managed through the complete business operation-development-operation continuum. Result symptoms must be known to know the performance problems to solve and the value in solving performance problems. Capital solutions must be specified, developed, and implemented to solve performance problems to improve or enable the results. The results produced from implemented solutions must be measured to know the actual value in removing the symptoms against the value if the symptoms were not removed. This added value-added over the development payback period provides the return on the total project investment.

Investment planning must plan the results to be improved

The need for development starts from business operations in the form of actual or anticipated result symptoms. Result symptoms are business situations like customer dissatisfied, product quality unreliable, or new market needed that indicate low result volume, value, or quality or high result risk. A result chain may have low value-added and need improved system solutions. Result volume increases may need new facility development. Low result quality may require human capital development. The benefit of the investment is in the value of removing the result symptom by increasing performance capacity, lowering performance costs, improving performance effectiveness, and reducing performance uncertainty. The cost of the investment is in the capital development to provide the needed or improved capital solutions.

Each result to be developed has a forecasted value-added without development. For existing results, the value-added may be negative, if forecasted performance costs exceed result value. The value without development is zero for new results to be developed. The planned business structure after development is analyzed to forecast planned result value-added. After new solutions are implemented, all results must produce a positive value-added over performance costs. The value-added after development over the payback period less the value-added with no development provides the added value-added that substantiates the investment and provides the planned return.

Capital development must develop results of value

Capital development is replaced by results-driven capital development to develop not only the new capital required but also the results to be produced. Capital development is managed for each specific solution needed to produce specific results for the future value from using the solution. Capital solutions are produced as results-driven capital development project results. Acquisition and development costs are captured against each project result. The project results are implemented as performance solutions and the development costs provide an assumed capital worth. The solutions and results to be produced are added to the enterprise business structure to manage actual costs, value, and capital worth.

Results utilizing implemented solutions must be managed to measure return

Results and capital solutions utilized in performance are managed as part of normal business operations after development. The portion of actual result value-added provided is assessed against the worth of each solution utilized as a portion of total solution worth. The portions are updated, as needed, in periodic capital assessment to update capital solution worth. The actual value-added is captured against the forecasted value-added with no development. The added value-added builds to the return on investment, accumulated over the payback period. The actual return on investment for each capital solution utilized is the result value created that is attributed to each capital solution utilized to create the value. The result value created to date less investment costs amortized as performance costs to date gives the gain or loss on the investment.

These new concepts may be difficult to understand for those who have learned the rules of 20^th century enterprise management. But, 21^st century business management is natural common-sense management. As experience is gained in managing the actual business, the measurement and management of result value, performance costs, capital worth, and added result value-added become routine.

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