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CFO Insights — Capital allocation: Seeing the value in a value architecture

Published on: Apr 05, 2018

Making sound investment decisions is a perennial top-of-mind issue for CFOs — made even more so now given the potential effects of tax reform and cash repatriation. And, because of pressure to make the right investments, it is not surprising that many finance chiefs are also reexamining their capital allocation processes.

It is no easy task. Comparing projects on a uniform basis is complex, as is quantifying the risks and potential benefits. Many finance managers also point to time-consuming manual analyses, the challenge of aligning capital expenditures with strategy, potential biases in decision-making, and the difficulty in holding people accountable for results.

Fortunately, there is a better way to approach capital allocation. It starts with the development of a “value architecture” that details how to evaluate investments in terms of strategy and risk appetite. The value architecture also serves as a framework for how everyone involved in the process thinks about capital allocation, including trade-off decisions and the project portfolio management strategy.

This issue — the second installment of a two-part discussion on capital allocation — explores some of the key steps needed to create a value architecture and explains why CFOs are well-positioned to lead such efforts.

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