Curse of the Legacy
It happens a lot this time of year. Companies that prepared their calendar year budgets are now implementing those budgets and many are finding that when they squeezed out their capital expenditure (capex) budgets late last year, attempting to manage their bottom line, that they were a bit short sighted in realizing how much capital expenditures they really needed.
It can be especially exasperating as often these budgets were revised over and over until finally approved. You have seen that and so have I.
Individual departmental or divisional budgets may initially seem to be in line. However, when the overall picture for the entire company is put together, the grand total may be more (or less, depending on your perspective) than the senior execs and/or the board will approve.
Sometimes it is due to the requests for additional headcount, other times it may be due to various overhead items. Often though it is due to operations departments requesting more for their capital expenditures than will be approved.
While some managers may have excessive requests, too often they make reasonable requests, but are caught by the curse of the legacy.
What is this? Legacy equipment is equipment that the company has had for some time, but for a variety of reasons does not want to replace, even though replacement is overdue. “It runs, right?” is the frequent response to the request.
It is the recurring challenge companies large and small face as they attempt to replace and upgrade equipment. It happens in a lot of companies, but most often in companies in relatively low margin businesses.
Often companies buy a significant amount of equipment during their start up days and then add to it regularly as the company grows, spending for expansion based on new projects that have come in, thus increasing capacity. But, when the company stabilizes, finding the additional capital to replace old equipment becomes a challenge.
The reasons for this are many. We have heard (and at times provided) the explanations or the rationalizations. Sometimes the equipment is so busy that it just cannot be taken out of service. Sometimes, management decides that it is just better to continue to fix it rather than to replace it. That is commendable, but at times, the cost of incessant repairs, including the hidden cost of employee morale is greater than the cost to replace.
And even though many companies do not upgrade and replace equipment as often as may be necessary due to financial pressures, when the company is sold, the new owners often undertake the upgrade and expansion process to put their stamp on the facility. Often the cost to do so is part of their financial analysis upon which their bid price is based.
So, what is the solution? It is not easy, especially when there is always something more pressing to spend on. We have all encountered that.
However, it is vital that the companies have a set system to consistently examine their equipment usage, purchase dates, repair and maintenance records and the upgrades that are available in the marketplace. This is, of course, dependent on their ability to maintain adequate records.
In our discussions with various production and post production organizations, for example, some see the current standard definition to high definition transition as a time when it is opportune to drastically upgrade or be forced out of business. While this has been a process that has been ongoing for several years, in the next year more channels will be HD and thus the supporting infrastructure will be required. They can’t be caught by the curse of the legacy.
Other facilities, with the ongoing switchover to file based systems are re-inventing their pipelines to accommodate more efficient methodologies at all points in their processes.
DirectTV has been working on a major upgrade with many added HD channels and the cable systems will need to follow suit. The telco systems, namely FiOS and U-verse appear to have HD at the heart of their systems.
In the final analysis, to be sure not to be caught by the curse of the legacy, companies will need to put more thought and effort into their financial planning processes. This should include a master capital expenditure plan to examine the needs for the next three to five years and it will need to be reviewed and updated on a regular basis.
A more formal approach than what is present in many organizations can help to stave off the curse.
