Capital Allocation Lessons From The Oil And Gas Industry

It’s not always enough to decide whether or not a project will be successful, financial constraints mean that managers often have to choose between competing projects, but setting priorities aren’t always rigorously set.

“When it comes down to the final decision, especially when hard choices need to be made among multiple opportunities, they resort to less rigorous means—arbitrarily discounting estimates of expected returns, for example, or applying overly broad risk premiums,” write Martin Pergler and Anders Rasmussen for McKinsey & Company.

To make better choices about capital allocation, Pergler and Rasmussen recommend a few techniques common in the oil and gas industry, where companies often have to choose between an array of similar medium size projects.

Capital Allocation: Assess your...

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