Capital Investment Decisions are Based on Emotion
In my last post, I made a promise to deliver on my personal brand equity of "provocative professor". I am hoping you find the title of this blog starts to payoff on the provocative component of my equity. To understand why I believe that in the end capital investment decisions are based on emotion rather than hard, cold, rational facts, I need to share what I have learned about the process.
There are three Moments of Truth in the capital investment decision process. The First Moment is about winning the right to compete. This is when the capital investor (or consultant) is seeking to converge on a few locations for due diligence. These locations receive a request for proposal. In this phase, any misperception may be sufficient to eliminate a location from receiving an RFP. The elimination choice is typically emotionally based versus rationally based.
The Second Moment of Truth is winning the competition. This is the Moment where the capital investor "kicks the tires" and seeks to understand what the risks and benefits are to building a business in each location. A detailed set of questions and data requirements are provided, and a project net present value is calculated over the project’s planning horizon. This is not a closed bid process, so most of the time the CEO is faced with 2 – 3 projects that have essentially equivalent NPV valuations and meet the minimum criteria for selection. There is no longer a rational basis to differentiate one choice from the others. The CEO then is forced to decide based on perception. This perception is formed over time and either reinforced or reprogrammed during the evaluation process. But it is the emotional perception of the CEO that drives the final location choice decision.
The Third Moment of Truth is all about winning the repeat investment. This Moment is won or lost based on the actual day-to-day experience the executive and employees have while working and living in the location. The interaction creates a perception that makes the location feel like either the ideal choice to grow a business, or a wrong choice to continue investing capital in. This is the Moment where you hope to create passion for and loyalty to the location that can be leveraged when the opportunity for expansion arises. And, when that Moment arrives, the decision to go or stay will be fundamentally emotional, albeit rationalized with a financial argument.
In each Moment, there is a choice that is underpinned by both rational and emotional considerations. But, the final choice in each Moment requires the CEO to assume risk and is ultimately made based on emotional considerations supported by a rational argument.
The implication of this insight is the critical importance of positively influencing perception in each Moment of Truth. The best location that "feels" wrong will rarely, if ever, be selected for capital investment. Making a competitive rational argument is, more often than not, the "ticket to entry" versus the reason for selection. The question this begs is "Are economic development professionals investing sufficient time, energy and money in creating a strong, heart opening emotional connection with capital investors?". My observation is that the answer is no. More attention should be invested in addressing the needs of Companies currently working to build a successful business in a location. For perspective, the national data argue that roughly 80% of new job growth will come from Companies already in a given location like a Region or state. Consequently, delivering against the needs of existing Companies helps create a collaborative partnership relationship that builds passion for a location and makes it "feel" like home. This passion becomes a powerful barrier to relocation and helps retain and expand jobs in an area.
Because successful collaboration is such an important driver to winning the Third Moment of Truth, I thought it might be helpful to share 9 keys to success I have compiled from research, the wisdom of others, and personal experience.
1. Senior leadership involvement. It is important to establish a single point of accountability within each partnering group (or geography) who is committed to the success of the collaboration. This person must have decision-making authority and the ability to bring additional resources to the alliance on an as needed basis in order to overcome inevitable obstacles. Without senior leadership commitment, collaborations are at risk of failing the first time there is a difference of opinion in direction or a perceived unequal benefit. It is important that all appropriate levels of government are represented.
2. Adequate resources to get the job done. This includes having the right people/organizations involved and sufficient funding to achieve the objective. Many collaborations fall apart because the resources were never put in place to permit success, or funds were anticipated and never materialized.
3. Clear objectives. Collaborations are an organizational choice to more efficiently or effectively achieve a specific objective. The objective needs to be transparently defined, time bound and understood by everybody involved.
4. Clear roles and responsibilities. It is extremely important each member of the collaboration understands what is expected of him or her and how their contribution helps deliver the overall objective. A set of aligned guiding principles helps ensure collaborative behavior and conflict resolution.
5. Frequent, respectful communication. The leaders at all levels must be routinely and fully informed to ensure the best decisions are being made and appropriate progress is being delivered. This is often facilitated through face-to-face meetings and written updates. Key is objectivity and candor.
6. Formal decision structure. Unilateral decision-making creates distrust and is the surest path to failure of the collaboration. A defined process helps the operating Team by establishing decision rights between the Team and Leadership levels. One of the more effective decision processes is the RACI model. A description of the model can be found at the following website -http://finance.isixsigma.com/library/content/c040211a.asp
7. Measurement of progress. Collaborations need to have a measurement system in place to provide all members with feedback on progress. This helps to establish realistic expectations and forces data driven decisions.
8. Integrated work systems. It is important that partners bring their unique resources to the collaboration and that common work is done in a consistent way. For example, leads generated for economic development need to be managed in a consistent manner by all members of the collaboration.
9. Aligned conflict resolution process. It is important that decisions are made that focus on delivering the objective and managed constructively. Partners must keep common interests in mind. They need to clarify the issue, seek to understand the partner’s point-of-view, present their own point-of-view, discuss the differences and resolve to solve the problem together. How collaborations manage through conflict has a large effect on overall success or failure.