Case – Finance: PUT YOUR MONEY WHERE YOUR STRATEGY IS
Investment capital allocation standardization and harmonization
Summary: What has been solved?
DHL Consulting helped develop a capital allocation approach to support the Group’s strategy, balance various divisional needs, and help reach the financial targets.
Client
Deutsche Post DHL Group
Task
Create a revised supply chain strategy to cut costs and meet strict customer demands
Results
The customer implemented the suggested course of action and achieved an estimated USD 10 million in savings
Team
The DHL Consulting team consisted of one Project Manager and 2 Consultants in collaboration with DHL’s Global Customer Manager and 2 DHL Supply Chain experts
Challenge: Modernizing capital allocation to reflect new complexities
Deutsche Post DHL Group invests up to EUR 2 billion each year in building up and improving its asset base. That sum, however, is just a fraction of what would be needed to pursue all the great ideas its divisions come up with. Investment capital is scarce, and funds must be allocated intelligently to achieve the best possible results. Considering the hundreds of projects carried out each year – and the complexity of Deutsche Post DHL Group’s organization – capital allocation is a very complicated task.
In the past, it was relatively straightforward: the allocation of new capital to each division was determined by taking historic expenditure and adjusting for major projects, substantial business changes and overall capital availability.
While easy to execute, this method had two major shortcomings. First, it did not ensure maximum return on investment, as various projects were not compared within a consistent framework. Second, and even more importantly, the method did not adequately reflect the overall group strategy, which would require synchronized investment approaches across all divisions.
Team: DHL-Consulting joins forces with Deutsche Post DHL Group top executives
To face the challenge of revising the capital allocation scheme, DHL Consulting teamed up with multiple experts from three departments – Corporate Development, Corporate Controlling and Corporate Finance.
Due to the strategic importance of the project, it was one of the top items on the executive agenda. Three Executive Vice Presidents attended nearly every workshop with the team. The interim results of the project were presented directly to Deutsche Post DHL Group’s CEO and CFO, as well as to the Divisional Financial Officers.
Approach: Cutting through organizational complexities for the best possible solution
In theory, capital allocation is relatively simple: just put your money where you expect the highest return on investment. In practice, however, the topic is more complex. There is little opportunity for easy solutions when choosing among hundreds of potential investment projects, not to mention when taking group and divisional strategies into consideration, as well as the intricate organizational structures covering approximately 220 countries and territories.
DHL Consulting interviewed other companies to understand how they allocate their investments, and what challenges they face in the process. Based on this primary research, it was decided to define a high-level target over the course of several workshops. The tricky part was getting the details right, such as agreeing on the key metric for return on investment and deciding how to calculate it – a process which took quite a lot of effort and revision.
The support DHL Consulting provided in the development of the Deutsche Post DHL Group Strategy 2020 in parallel to the capital allocation project allowed us to tweak the company’s approach to capital allocation, thus ensuring that they really could “put their money where their strategy is”.
Results: Carpe diem – instituting a plan of action for improved capital allocation
DHL Consulting developed a step-by-step approach to determine the best capital allocation practices for Deutsche Post DHL Group:
- Align the strategic direction with financial goals
- Develop alternative options for each division, such as base case and growth case
- Make sure every option has a clear indication of return on investment
- Evaluate the options against defined criteria for strategic fit and potential risk
- Encourage healthy competition for capital across divisions
- Jointly review all options provided by the divisions by the Board of Management and agree on actual capital allocation
- Review capital investments annually to ensure they stay in line with financial and strategic goals
The new process was implemented over a two-year period. Several key elements were first tested before the fully realigned process was initiated. As a result, the formal process now enables the Corporate Board to make more informed decisions based on thorough analyses and other supporting materials. How capital is ultimately allocated, however, is and will remain up to the discretion of the Corporate Board.
Lessons Learned: How to make solutions really work
A few lessons really stood out in this project. First, our intrinsic knowledge of how DPDHL “ticks” really is a major success factor, as it helps to get buy-in from all key stakeholders.
Secondly, coming up with an ideal theoretical solution to a challenge will only take a fraction of the time needed to make it work in real operations.
“With the support of DHL Consulting, our Corporate Board achieved an unprecedented level of transparency for fact-based decisions on large-scale investments. Our outside-in expert view coupled with our intimate knowledge of the Group was key to this success.
- sabine.mueller@dhl.com