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Why capital investment is imperative for TMT companies
In this episode, members of the EY Strategy and Transactions team explore the pain points companies are experiencing around capital investments and what they need to do next.
Join us as we discuss capital operations and the imperatives for TMT companies as they continue to recover from the pandemic. Never has capital investment been more significant, and a robust approach to capital planning and deployment can translate into a significant competitive advantage.
A recent EY survey of global TMT executives revealed that 87% of respondents said the success of their recovery depends on maintaining certain levels of capital investment. But, perhaps surprisingly, 70% of those TMT leaders said they struggle to demonstrate the value of their capital investments.
We hear from EY TMT leaders Loren Garruto and Daniel Theander as they discuss why TMT companies often struggle to hit their capital investment objectives and what approaches they can take to overcome this.
Insights from:
Daniel Theander, EY US-Central Region Technology, Media & Entertainment and Telecommunications (TMT) Consulting Leader, Ernst & Young LLP
Loren Garruto, EY Global and Americas Corporate Finance Leader
Christina Winquist, EY TMT go-to-market strategy lead
Key takeaways include:
Capital allocation strategies should align with, and drive, the business’ long-term strategy and value creation, but also be flexible and agile enough to pivot during disruption.
Put people at the center of your strategy. Having the right talent and skill sets is the strongest competitive advantage.
Ensure robust processes and governance are in place not only during the initial investment decision but for ongoing monitoring purposes as well.
EY has surveyed global TMT executives to explore how they allocate and deploy capital. Explore the results: If you were able to look into the future, could you capitalize on it?
For your convenience, full text transcript of this podcast is also available.
Announcer
Welcome to the EY Tech Connect podcast, where we have candid conversation about the most
pressing priorities facing tech, media and entertainment, and telecommunications companies, and provide strategic insights on the key issues that matter to them. As industry ecosystems evolve in new directions, we use these discussions to reflect on how companies can not only take advantage of new opportunities, but also tackle emerging challenges.
Adrian Baschnonga
Welcome to EY Tech Connect, I’m Adrian Baschnonga, Lead Analyst for Global Telecommunications at EY.
Christina Winquist
And I’m Christina Winquist, Global Brand, Marketing and Communications leader for our TMT clients.
Baschnonga
So today, we’re going to talk about capital operations and the imperatives for TMT companies as they continue to recover from the pandemic. Never has capital investment been more significant, and a robust approach to capital planning and deployment can translate into significant competitive advantage.
Today, we welcome Loren Garruto, Americas Transaction and Corporate Finance Leader at EY, as well as Daniel Theander, our Global Capital Operations and Innovation Leader, to dive deeper into this timely and important topic. Welcome to you both.
Loren Garruto
Thanks, Adrian, looking forward to our conversation.
Daniel H Theander
Thanks, Adrian, great to be here on this very timely and exciting topic.
Winquist
All right, we’re excited to talk to you guys today. I believe EY recently surveyed global TMT executives to understand how they allocate and deploy capital, and where they are in their maturity. It seems 87% of TMT leaders said the success of their own recovery depends on maintaining certain levels of capital investment. But 70% of those, shockingly, struggled to demonstrate the value of their capital investments. Loren, I’ll start with you. Why do TMT companies struggle to hit their capital investment objectives?
Garruto
Well, thanks, Christina. I think TMT companies tend to have large capital needs. And combine that with the fact that they’re operating in an ecosystem that has been subject to a number of disrupters, and not just the pandemic, but regulatory changes, both positive and negative, as well as digital transformation. What I’m seeing in the market is some of the key impediments to successful capital investing really include lack of agility, as well as lack of a really robust process or governance around capital investing, as well a failure to learn from past mistakes.
As the economy recovers from the pandemic, it’s really important for companies to be able to quickly assess new opportunities, take advantage of them and adjust their capital investment strategy. That might be understanding where the competitors are investing. And they might choose to follow that flow of funds, or they may pick an alternative capital investment plan based on that knowledge. Having a really robust process and governance around capital investment and not only from the perspective of the initial investment decision but at the ongoing monitoring as well.
One of the things that I’m hearing more and more companies talk about is the need to incorporate more nonfinancial and even non-quantitative KPIs into the capital investment decision process. And that could include things like ESG or other nonfinancial metrics, such as employee health and safety. The last thing that I would note is that postmortem reviews to learn from past mistakes, and that not only means learning how to avoid those bad or poor investment choices, but also a leading practice that I see in companies is to go back and evaluate those missed opportunities, so when they come around again, you’re also learning from that.
Winquist
Right.
Baschnonga
Thanks, Loren, really interesting to hear your perspective on the drivers for the increased focus that TMT companies need to have on this. And just sticking with the notion of agility, when it comes to both capital investment decision-making and project execution, why is agility so important for TMTs? Daniel, what’s your take on this?
Theander
It’s a critical area to stay competitive in and, just to build a little bit on Loren’s comment, TMT companies always are in a space where innovation is rapid, disruption happens quickly and that of course has been just amplified during the last 18 or so months, during the pandemic. Things that in the past maybe had a three-year planning cycle and horizon is now implemented in just a number of months. So, the agility imperative is now more critical than ever.
I don’t think we’re going to go back to a multiyear planning cycle. And, instead, we need to have more, quicker, speed to market. There are so many wonderful new innovations that’s coming online. 5G, of course, is enabling a lot of new different business models. We start looking at IoT and all the opportunities around that, not just in TMT companies but across sectors as well, edge cloud and the list goes on and on. And that is really an opportunity for us to enable new business models. Without agility, you can either be very successful or you might actually be left behind as the innovation and the pace of change continues to increase.
Winquist
All right, great. You mentioned the latest technologies in 5G and IoT and cloud edge. How can advanced analytics and automation become a competitive advantage?
Garruto
Oh, really exciting area, great question. I think advanced analytics can really help companies quickly access and analyze large amounts of internal, as well as external, data. And that can help them identify what the key value drivers of the business truly are. And if you think about it, this can improve not only the speed but also the quality of the analysis that companies are able to do, as well as reduce cycle time for making those really important business decisions.
I think leveraging automation could also help you monitor those key value drivers, so you would know when a course correction might be needed — being able to run numerous what-if scenarios. I think prior to the pandemic, there wasn’t a lot of, I’d say, doomsday-scenario modeling. But now, with things like supply chain disruption, cybersecurity, even company-specific, country-specific risks, the need to be able to quickly look at different what-if scenarios and assure your stakeholders that you would be able to adjust is really important.
Automation, as well as advanced analytics, allows some of those routine processes to be automated. And, at the end of the day, that gives you more time to do the type of value-added analytics that really drive better decision-making.
Winquist
Okay, great. Daniel, any comments from you?
Theander
Data is not new. Companies have had lots of data over the years. But what really has changed is the need to interconnect that data in a more holistic way. So it’s not just an annual planning cycle where you’re looking at how to deploy your capital, but how is that then being allocated into the different functions and areas of the organization? So, for instance, supply chain, is that connected with engineering, construction and so forth to get that holistic view? Sixty-three percent of companies felt that they did not achieve the return on their initial expectation of that business case. And, to a large part, it’s the fact that there is not enough connectivity between those different areas that consumes this capital.
Just to give you an example, we worked with a cable company, and they were going to allocate hundreds and hundreds and millions of dollars to increase their footprint in terms of number of homes passed. And it was a business case put together, and it was an expectation of what each home was going to cost. Because they didn’t have an interconnected data flow between these different functions, as I mentioned, six, seven months later, they realized that the cost was almost 60% or 70% higher than originally planned.
Winquist
Wow.
Theander
And then it took another three to four months to remedy and in the end, they ended up about 20, 25% higher than original plan. So that’s just an example of the importance of following through the full capital lifecycle all the way through the execution. One final point on this: I know we’re talking today more about, kind of, the capital planning and execution, but many of these efforts that you build, you might spend six months building a new product and launching it, or an asset, but they stay with you for 10 years, 15 years, and maybe longer.
Winquist
Right.
Theander
And that’s another key component, that the data needs to not just be a point in time, it needs to be an integrated flow so you start improving that fairly challenging metric that we saw that they’re not getting their return on their investments because that investment can stay with you for quite some time. And back to Loren’s point, is to learn from those efforts so you can improve cycle over cycle.
Garruto
Yes, and Daniel, that brings up another good point. A lot of the large capital projects in the TMT space, there are also a number of interdependencies between the projects. So, you may have five or six in-flight capital projects, something going sideways with one of them could actually have an impact on several others. So, I think you bring up a good point, that being able to monitor the projects and how they relate to each other over their full lifecycle is extremely important.
Baschnonga
Thanks for that Daniel and Loren, and really interesting to think about this idea of interdependencies and interconnectedness supporting an effective data strategy. But people are still vital to making this all work, aren’t they? And 89% of leaders in our study believe that they will derive a competitive advantage from their ability to maintain a highly skilled workforce to manage capital projects. So, Loren, why are optimized skills such an important step for TMT companies to take?
Garruto
You know, that is an excellent question because with all the new technologies and data available, like you said, you still have to have the talent to be able to take advantage of them. So, upskilling FP&A talent to be able to leverage the new technologies, whether that’s advanced analytics or automation, it’s going to not only allow you to have better insights, but also quicker turnaround time, so that gets back to the agility that we started off our conversation with.
I think companies are coming to realize that historically, FP&A teams tended to spend 80% of their time on the FP, the financial planning part of it, and only 20% on analysis. And upskilling the talent would allow them to really reverse that and spend the majority of their time on true business analytics that allows for better decision-making.
The other aspect is that the amount of external data is simply vast, from infection data by ZIP code to customer mobility data from cellphones to even customer sentiments that you can glean from social media. But you still have to have the skills to actually not only access that data but quickly analyze it and incorporate it into your forecast and scenario planning. So, I think talent is a key competitive advantage if you can keep the skills ahead of the curve and ahead of the competition.
Baschnonga
That’s really interesting, Loren.
Theander
Yes, Loren, it was an interesting comment. One CFO that we worked with, to address that interconnectivity that we just discussed, she implemented a rotation program where people on her FP&A team were in the field with a construction team, or they worked in supply chain, to again, just connect many of these different aspects of the full capital lifecycle. And it was really very successful, and it improved the connectivity on how the planning group worked on an ongoing basis.
Garruto
Yes, Dana, that’s a great example and I’ve got another one where most of the business cases for new capital investments at this company were being populated and the data assembled by the engineers. And what they discovered is that giving a pretty basic training and understanding of some key financial concepts in terms of discounted cash flow, what goes into the development of a discount rate, present-value factors, et cetera, really gave the engineers that were putting the business cases together, a different — a financial perspective and enhanced the analysis that they were doing.
Theander
So, on the talent and skills topic, I would say that that is probably one of the most differentiated areas that a company is challenged with today. If you’re looking at the number of people that can write AI classifier, you start looking at the new opportunities around edge cloud, it’s not really a lack of the technological innovation, but rather how do you actually get the right people into your organization to capitalize on these opportunities?
And just to give you an example, if you’re looking at a lot of the telecommunication companies and cable companies, they often roll an awful lot of trucks to service, trouble-shoot and so forth, and with new data and new AI-enabled image capture and so forth, they might be able to prevent a truck roll. You can solve it remotely. And, in the past, you might need more network engineers, and in today’s environment, the network is become more software-enabled, so you actually need more software engineers and data scientists. These are the types of aspects why the right talent and the right skills is really a tremendous competitive advantage or disadvantage. And the retention and retraining of your workforce is really a key part of this strategy.
One cable company that we worked with, we were able to see a fairly substantial reduction in number of truck rolls by some 15% to 20%. And early on, it was primarily a cost savings effort that we undertook. But we also realized that by rolling 15% fewer trucks, it has a massive impact on the carbon footprint. So, by rolling fewer trucks, obviously, we burn less fuel. So, I think that goes back to what Loren pointed out earlier, of looking at holistic perspective. It’s not just the financials, but if you’re looking at all the stakeholders, and in today’s environment, I think we’re all aware that most publicly traded companies are getting ESG scores. So, by looking at it not just from in this example, reducing truck rolls, but also could have other positive impacts — that gives you a much more holistic view of the value of that business case. It’s a great point.
Winquist
Absolutely. So let me shift a bit in an effort to focus on active governance and transparent communications, what role do senior executives and even the board members play in achieving capital investment imperatives?
Garruto
You know Christina, I think an increasingly important skill set is stakeholder communications, and you’ll note that I used the term “stakeholder” vs. “shareholder.” Most companies have realized that it’s not only investors, but also employees, regulators, people in the community all really need to clearly understand how capital investments are aligned to facilitate the overall corporate strategy. So, your stakeholder communications are what’s going to allow you to build trust, really by outlining a clear investment roadmap to the future. How does everything that you’re investing in today actually build and facilitate the overall corporate strategy?
Ultimately, companies’ capital allocation strategy should align with and drive the long-term strategy and value creation, but also be flexible enough or agile enough to pivot during a disruption. So, what the future looks like, what your company will look like, whether it has the right assets and capabilities, all of this needs to be communicated in a very transparent and forthright manner to the stakeholders. And whether you’re looking to invest in the core business, perhaps rebalance the portfolio with some different investments — either through M&A or digital investments — it’s really important not only to develop an agile capital allocation strategy, but to communicate it in a way that you get credit for it in your ultimate shareholder value.
Winquist
OK, fantastic. Anything from you Daniel on this one?
Theander
To me, this is actually a lot of the things comes down to how are you setting up that dynamic business planning? To Loren’s point, certainly companies have multiyear strategies, kind of the competitive advantage in certain areas. But how do you decompose that into what’s happening on a quarterly basis and a monthly basis? So, one thing that I often like to say is that yes, you do have an annual planning cycle, but you really do need to have a dynamic business planning framework.
So, to give you an example, if you put together a plan and you’re going to start shoveling the ground in January and, given it’s a rough winter and for three months you can’t execute that work, you don’t want to hold that capital hostage for three, four months, and maybe that capital can be deployed somewhere else. And if you don’t have a dynamic framework connecting data, talent, you’re most likely getting suboptimal outcomes.
Often, we talk about not having enough capital to deploy. I’ve seen a few cases where they’re underspending because there’s a lack of dynamic planning. Often there is legacy systems, they don’t talk to one another, but frankly, it’s the communication between different functional groups that I think is even potentially a bigger issue, at least near-term. So, governance is really the full construct, from I have capital I want to deploy all the way to realizing that value throughout the full lifecycle.
And, as Loren pointed out before, in TMT companies, that could be multiyear. And, frankly, I’ve seen many times the business case being put together, it moves forward, and no one ever looks at what the parameters were for that business case. It’s hard to see if you delivered or didn’t.
Baschnonga
That’s great, really interesting, Daniel and Loren, to hear about some of these active governance considerations and, also, just the range of imperatives that TMTs need to consider, as we start to think what are the key takeaways that, what really is the call to action. And any summary thoughts from you?
Theander
I think, Adrian, kind of what we’ve covered here in today’s conversation, I’d say we can really boil this down to really three calls to action. We highlighted the overall importance of agility and being an adaptive organization. Well, all good and well, so what do you do to get there? There are these three main themes that we covered. And that is having a data strategy that interconnects systems, processes, functions to get more real-time or near-real-time information flow.
The second item is focus on people. At the end of the day, the right talent and the right skills will become, in my opinion, by far, the most, strongest, competitive advantage you can have in the market, especially for TMT companies. And then, the last topic we just covered is the concept around active governance and communication. By having better data strategy and the talent and the skills, that is a key enabler to get that active governance that we discussed. So, I would say those are the three enablers to get to better competitive advantage.
Garruto
Very well said, Daniel. And I think capital allocation is an area that’s just ripe for continuous improvement. We did a survey recently of 1,000 CFOs on capital allocation. And, maybe surprisingly, the majority, nearly 80%, said that this was an area that they needed to improve in their company, that that was data, tools, talent or the overall process. But I think the single most surprising result that came out of the survey that should be a call to action is that less than 10% said that they actually leveraged postmortem reviews to learn from their prior mistakes.
So, I think by simply taking a look at investments that turned out well, investments that fared poorly or opportunities that you just completely missed, I think that’s low-hanging fruit for improving the capital investment decision process.
Winquist
All right, great. Well, thank you guys so much for joining us today. This has been a fascinating discussion. And for more thought leading perspectives, visit ey.com/TMT and that’s where you can access EY’s global capital operations and innovations study, where a lot of these stats are available. You can also follow us on Twitter @EY_TMT and don’t’ forget to subscribe. So Loren, Daniel, thank you so much again for your time today.
