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Having the right data, and the right analytics tools to evaluate the data, coupled with proper statistical analysis, is key to not only making capital allocation decisions, but to analyzing the performance of past investments in order to course correct when necessary and learn lessons to optimize future decisions. Tech companies with successful capital allocation frameworks have the processes and tools in place to execute upon a nimble, effective, decision-making framework. Clearly defined measurement criteria and KPIs built around data analysis are a key pillar of an effective capital allocation framework.
Yet the tech industry, which in many cases generates a trove of data in its operations, is far more likely (49% vs. 41%) to cite insufficient data as a primary barrier to optimal capital allocation. Some mature tech companies use legacy systems that are not always interconnected, making it more challenging to pull meaningful data, which could necessitate investing in systems integration. Also, to better utilize data, tech companies should consider data visualization software to understand where capital investment may be needed.
Additionally, companies should scrutinize and carefully assess data to the extent it does exist and search out new third-party sources of data if they do not have the data they need internally. For example, we observed a major technology company rely on a legacy allocation methodology that resulted in misguided conclusions as to the profitability of a business segment. We scrutinized the data and assumptions to present management with a grounded view of segment operations. Company executives were then able to make informed decisions around portfolio rationalization.
Less than half (45%) of tech CFOs say that investment evaluation criteria, management incentives and long-term strategy were fully aligned, compared with 58% of their non-tech counterparts. This misalignment can hinder the long-term thinking required for management to be effective stewards of capital. Instilling a cash culture that balances both long- and short-term risk with ROI can help ensure that executives don’t make decisions that might give a short-term boost to the stock price, while crippling the company down the road. Additionally, in a time where it’s becoming more common for horizonal companies to enter vertical markets both organically and through M&A, it is important that incentives are rethought as vertical markets which often require a nuanced incentive structure (i.e., subscriber growth for a particular product segment) as opposed to general profitability targets that are often in place at horizontal companies.