Without a rigorous value justification process, organizations purchase millions of dollars of capital equipment (new and used) annually to replace their old technology, maintain or improve their physical plant, or start up new programs. In fact, based on my observation, most corporations don’t even have a capital expenditure committee or technology value analysis team in place to determine if their capital expenditure purchases are even needed, let alone value justified. Instead, most capital expenditure justifications are made behind closed doors of the executive suite with the department head that requested the equipment and without a formal process to weed out bloated capital budgets and feature-rich, non-conforming expenditures.

If you are serious about reducing your capital expenditures by 25% or more, here are three steps to make those savings happen:

1. Open Your Capital Expenditure Process to Peer Review

Most organizations’ capital expenditure decision making process involves the CEO, CFO, COO, division vice president, and the department head who requested the expenditure, which limits input from unbiased and disinterested parties who could greatly contribute to this decision.

A much better way to evaluate capital expenditures is to form a capital expenditure committee or technology value analysis team made up of operational and non-operational members who have no stake in the capital purchase being proposed. This way, team members can give senior management untainted and unvarnished opinions on the appropriateness of each purchase.

2. Start Your Capital Purchasing Evaluation Process Early

Allow your capital expenditure committee or technology value analysis team to participate in your capital expenditure “vetting” process as early as possible, preferably when capital expenditures are submitted to the office of the vice president of finance for review. Let this committee or team financially justify and prioritize your corporation’s capital expenditures in consultation with the requesting departments, prior to submission to your finance committee for final approval. Naturally, your CFO or budget director would chair this committee or be the value analysis team leader, so that he or she could tie together all the loose ends required to meet your capital budget policies and procedures.

3. Value Justify All Capital Purchases with Value Analysis

Don’t accept that the requesting departments have all the answers and have looked at all of the possible functional alternatives available to your corporation. Make sure that value analysis tests are performed on all capital expenditures by your capital expenditure committee or technology value analysis team, before any bid is sent to interested vendors or purchase orders are released.

These three steps, if applied religiously to each capital expenditure requested by your department heads and chairperson, will position your corporation to reduce their capital expenditure costs by 25% or more without even breaking a sweat.

The winning formula for dramatically reducing your capital expenditures requires an “open” process of operational and non-operational peer review of all capital expenditures as early in the process as possible. It also requires a vigorous application of the techniques of value analysis to evaluate your capital expenditures, thus eliminating feature-rich non-conforming expenditures that are bloating your capital budgets and wasting millions of dollars a year in unnecessary purchases.