Headlined by The Times as ‘The £300m train crash‘, the Government has admitted a huge blunder in the awarding of the West Coast Main Line franchise. It appears that inflation and rising passenger numbers were not allowed for when assessing expected returns – the official figures just don’t add up. A knock-on effect has been a pause in the bidding process for three other franchises that are due to begin in 2013. What are the implications on HS2?
Possibly to many, this apparent ‘oversight’ is typical of civil servants. However, there are elements that occur equally or have analogues in the wider business community. The following are offered for consideration as ways that bad investment decisions can be made. Unfortunately, they are not exhaustive, just typical:
- Explicit or implicit favourites – consciously or unconsciously this is “Let’s cut to the chase; this is the only solution.” Unfortunately, it most often is a costly, poor solution
- Business case based on payback – unless an organisation is seriously cash-strapped and the payback has a short time horizon, this is a very blunt instrument, with little value
- Business case based only on the time-based value of money – IRR and NPV are useful measures (and can be used with payback to provide multiple views), but they are still too limiting unless the following point (at least) is addressed
- An expectation that the claimed benefits and the costs to achieve them are risk free – business cases based on “A 10% increase in revenue” or “20% decrease in costs” typically do not have as their underpinning adequate modelling of the uncertainty in attaining these, either in terms of downside or upside risks. There is an expectation that if requested, they will be achieved.
How much do you agree with these points? Do you have others to add?
PAshton
Latest posts by PAshton (see all)
- Bulletin – September 2015 - September 16, 2015
- Nick Dobson - September 15, 2015
- CITI introductory video - September 15, 2015