How to manage the coming wave of investment in capital projects

In this episode of The McKinsey Podcast, McKinsey senior partners Steffen Fuchs and Christoph Schmitz speak with executive editor Roberta Fusaro about the massive influx of capital coming companies’ way—most of it earmarked for decarbonizing and renewing critical infrastructure. Hear how executives and organizations will need to adapt their current spending strategies to take advantage of this unique funding moment.

After, if you have “perfectionist syndrome,” this one is for you. McKinsey senior partner Dymfke Kuijpers shares how seeking perfection prevented her from finding it.

The following transcript has been edited for clarity.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

A chance to rebuild and decarbonize

Roberta Fusaro: You wrote an article about how capital projects could receive $130 trillion from public and private sources in the next five years. That capital would be primarily earmarked for decarbonization and infrastructure renewal. Which sectors and initiatives are receiving all the money?

Steffen Fuchs: The first thing we need to establish is that the money you are talking about is truly a global allocation across literally every single asset class. It is a once-in-a-lifetime opportunity to rebuild critical infrastructure. And with critical infrastructure, I think we define not just public infrastructure but all infrastructure across all asset classes.

At the same time, it is an opportunity to use this money to think about decarbonization. There will likely not be another wave of capital investments like the one we’re seeing right now to help us decarbonize critical infrastructure. We’re talking about both building new infrastructure and, at the same time, decarbonizing that new infrastructure for future generations to come.

Christoph Schmitz: To build on that, roughly 50 percent of this money will end up in real infrastructure and the other 50 percent in sustainability-induced infrastructure, including solar plants, wind parks, electrolyzers, new technologies, steel manufacturing, and others. So these are the two core drivers, and there’s probably a 50-50 allocation of the money to those two sources.

Increased capital means increased complexity

Roberta Fusaro: In the article, you note the challenges for executives in managing this influx of capital. What’s different about this wave of capital investment, and what are some examples of the obstacles that executives may face?

Christoph Schmitz:We believe that the two differences and challenges will be, on the one hand, just the sheer amount of money to be spent, and on the other, the increased complexity and required speed of the projects. What do I mean by that?

If you take many of the sustainability-induced projects, they are no longer what I would call pure technical projects. They will not only need the involvement of many, many more stakeholders—from states and authorities to policy makers and regulators—but also require managing the shortage of resources that we will experience on labor and on assets, such as cranes, raw materials, etcetera.

So the complexity is just significantly increasing and will require much more rigorous and sophisticated stakeholder management. And at the same time, the speed of delivering these assets will need to increase. To give you an example, some of the assets need to be in place and up and running in 2027 to achieve the targets, while today’s approval process typically takes five to seven years.

So we will need to see—as we have seen in vaccine development recently—a significant compression of the timelines to just meet our targets.

Steffen Fuchs: I think the point about complexity is key to acknowledge. And I’m sure many listeners who are in the capital space know this, but a capital project is not typically a one-to-one relationship. It’s a one-to-many-hundreds relationship.

As the speed of execution goes up, the interdependencies between those different stakeholders that need to be able to work together in a seamless fashion obviously increase exponentially as well. To Christoph’s point, I think the complexity is one point.

Another point is that this is putting a lot of pressure on suppliers and the industry that’s supplying all these capital projects. Think about the amount of green steel we need to produce to actually decarbonize projects. Frankly, there’s not enough capacity in the market today to produce sufficient amounts of green steel or low-carbon steel that lets us meet those targets. The same is true with the workforce.

We’re already seeing certain geographies in Arizona, North Carolina, and Ohio that have seen a significant amount of capital inflow, and that is significantly affecting their labor pools. We’ve had a substantial amount of people leave the workforce post-COVID-19. We have not been able to refill those jobs. And so, with this massive influx and the inflationary pressures we’re seeing, costs are going to go up. On average, we’re seeing 10 to 15 percent cost increases in the US today. And schedules will continue to get squeezed.

You add those things together—the complexity of the projects, the pressure on the suppliers, and the labor pool—and you can see how this is going to be a very difficult task to deliver against.

Christoph Schmitz:One thing to add, return on invested capital [ROIC] will stay the key marker for capital markets to invest and for the valuation of companies. So everything just said increases the pressure on the cost side and, at the same time, on the time-to-market side. Again, this results in pressure on ROIC.

And that is something which companies will need to balance going forward: on the one hand, the need to move, to deliver on the sustainability targets, and on the other, there are still the capital markets. They also want their returns and their performance. This will be another angle of required management that we will see out there.

From project-driven to C-suite driven

Roberta Fusaro: I want to talk a little bit about another point that you make in the article about project-centric strategies that companies have traditionally used and how those might not fit the bill given the increased complexity and the greater speed with which companies need to act. Why, specifically, will this project-centric approach put companies at a disadvantage?

Steffen Fuchs: This has such significant implications on the balance sheet of a company that it can no longer be just a project-by-project approach. It actually has to be elevated to the C-suite level.

And so what we’re seeing is a much more balanced conversation with CFOs and CEOs who are saying, “I have a portfolio of projects that I need to deliver against over the next five years. All these projects need to be delivered on time and on schedule. They also need to deliver against decarbonization goals, and I need to meet certain ROIC metrics.”

That is no longer a job that can be delegated “just to a project team” because, at the end of the day, the project team needs to be empowered to execute against their project plans. They should not be the ones to carry the burden of optimizing and ensuring the entire company portfolio of capital projects is successful.

I think the second piece is that it raises the need to think differently about delivering these projects. And what we mean by that—and we’ve been talking about this for a couple of years now—is the use of analytics and the use of digital technology are playing a key role in this delivery approach.

We’re seeing many more companies that are investing together with their engineering construction firm partners to say, “How do we establish a baseline where we can constructively collaborate on how to deliver these projects? How do we use machine-learning-based algorithms to reallocate the workforce dynamically when we have a shortage, and we’ll not have idle time with workers?”

Again, these kinds of tweaks would also need to cut across all portfolio projects—because the technology itself will not deliver just on one project. It needs to be capable of replication.

There’s a third point that I’ll make, which is an approach to best practices. How do we accelerate knowledge sharing? How do we make sure that the best practices from a project carry over in real time to another project, and there’s not a postmortem once the project is done, but it’s a real-time and real-life learning exercise?

I think all those things have to come together. Then, it’s very easily understood that it no longer is a project-by-project conversation, but it has to be a C-suite conversation, and it has to be a portfolio conversation to be successful.

Roberta Fusaro: How hard or how easy will it be for companies to change mindsets or the way that they’re operating to that degree?

Christoph Schmitz: We are talking about a field that, in the past 60 years, probably has not been the most innovative in terms of adopting Industry 4.0: data-based, advanced-analytics-based technologies.

We will not only need to see this but also need to see that the way companies run projects will need to change. Changing 50-, 60-year-old habits will require a significant change in leadership, mindset, behavior, and way of working. The good thing is there is the high pressure to deliver on all these projects on budget and on time, so there will be a burning platform to deliver on that on the one hand.

On the other hand, this is something that will need to be led from the top and is probably one of the most fundamental changes that this industry has seen in the past 50 years. It’s a true challenge, an Everest challenge, in front of us here.

A holistic approach to decarbonization

Roberta Fusaro: So, thinking about the collaboration and the innovation required to meet the moment, can you talk about examples of companies that have started to make moves in that direction?

Steffen Fuchs: I’ll give you an example on the decarbonization piece because it is truly an example of innovation. We’ve been supporting a food company that’s been thinking about its global footprint when it comes to its facilities producing for local markets.

And the company was very explicit about how it’s going to make those allocation decisions based on its carbon footprint, and not just in the sense of, “How much energy are we going to consume?”

But carbon footprint in the sense of, “What kind of energy sources will we use?” Is this a renewable energy source? Or is the company going to use a nonrenewable energy source? Carbon footprint in the sense of, “What is the outlook of fresh drinking water available, and where are we going to build our plant for the next 20 years, and what’s our impact going to be on the fresh drinking water supply for the community that we’re going to be in?” Carbon footprint in the sense of, “How far are we going to truck the products if we pick Site A or Site B, and what are the implications on trucking cost?” And then carbon footprint when it comes down to, “How do we actually build the building?” So we’re back to, “How do we build it in a greener way?”

When senior leaders in organizations put their minds to it, it actually can happen. It certainly wasn’t easy, and it certainly was a lot of work and a lot of consideration, especially as they built multiple facilities around the globe. But they actually found a way to make this an innovative process to meet their goals to decarbonize and, at the same time, have an apples-to-apples comparison across their portfolio of projects, which was really important to them so that they could go back to their shareholders and to their board of management and explain why they’re making certain decisions in China, in the United States, in Indonesia, and wherever else they were building.

Christoph Schmitz: If you look at industries, innovation very often happens faster and is more radical outside the incumbent players. That is what we currently see in several spaces, where you see attackers in the, for example, electric-vehicle environment, battery factories, and others that are not incumbents.

They have the benefit—and you can see it in speed and in action—that they don’t need to change so much, but they immediately can deploy innovative processes, technologies, etcetera to be faster and more effective and efficient. At the same time, they undergo a different ROIC scheme at the capital markets that is geared more toward future growth and less toward current performance. So we currently see quite a number of players out there that are attackers and that are setting the standards for the future in terms of innovation, speed, and radical movement.

Opportunities over obstacles

Roberta Fusaro: Is there something to say about the role and importance of ecosystems and innovation in companies changing their approach to capital management?

Christoph Schmitz: If you look at how innovation and change happen, it typically requires singularities that trigger this change. It’s the nature of human beings to be complacent. We want standards, and we don’t like change. It’s very often put into a negative and threatening context: you need to change to defend, and so on. But I prefer this debate: How can we capture this opportunity for the better in all dimensions—making this a much more effective and efficient industry and accelerating the decarbonization that we need to deliver against? How can this industry contribute to this acceleration and to making this a green planet?

That is the debate we need. Also, change might come in a much more positive connotation than we typically see it. So it’s a huge opportunity and, at the same time, an obligation for the industry.

Steffen Fuchs: I think Christoph nailed it. The only thing I’ll say, Roberta, is if you look at our research and you see that the majority of the capital projects are 80 percent over budget and months behind schedule, you have to ask yourself the question, “What can we be doing differently to avoid similar outcomes in this day and age?” And $110 trillion to $130 trillion is a lot of money. But imagine that being 80 percent over budget. That suddenly is a whole lot more money. This question of, “What can we do differently?” That needs to be asked.

Move over opex, capex is taking center stage

Roberta Fusaro: Steffen, what can companies start to do now to change their approach to capital project management?

Steffen Fuchs: It has to be a C-suite agenda item. And in that context, it has to be linked to the company strategy. And we would say capex [capital expenditure] may be the new opex [operating expenditure] in the sense that, for the past ten years or so, most companies were focused on, “How do I work my P&L, and how do I reduce my operating cost?” Now it may actually be, “How do I work my balance sheet for the next ten years to make sure I can deliver against the capital expenditures that I need to? And how do I optimize on this front?” I think the second piece needs to be leveraging data. The conversation too often is about past experiences and what has worked in the past versus what’s working today and what’s actually happening in the field on a day-to-day basis.

And third, across the ecosystem, or the end-to-end value chain, you need to have conversations about more collaborative contracting behavior and more collaborative partnerships where it’s no longer a question of, “How do I reduce my risk and move liability from Party A to Party B”—because we all know that’s a zero-sum game—but, “How do I reduce risk period, and what do both parties need to do?”

And we’ve seen this in many industrial industries in the past. I mean, think about the automotive industry. Think about the semiconductor industry and the aerospace industry. Everybody has gone through this transition where tier 1 suppliers, who historically have been treated as vendors, suddenly started to become component suppliers and partners to the OEMs, and they’ve been able to make that shift. We’re not talking about concepts that are way out there and that haven’t been successful in other sectors. I think it’s a matter of, “How do we apply them successfully in this space?”

Christoph Schmitz:I just want to complement all the spot-on things that Steffen said because I believe there are two more things. Number one is we will need as an industry or industries to make sure there is capability building and the right capabilities in the organizations.

And secondly, the right mindset. We debated at length here about it. It will require a significant rethink in how to lead and steer all of that. In the end, it is all about people.

Last but not least, there is the question of resources. I believe that the industry, as total, needs to rethink, “How do we make sure and where do we get the resources from to deliver against all of that?” And resources are everything. It is people foremost, but also, “Where do we get the raw materials and the building materials from? Where do we get the land from?”

That’s closing the loop to what we mentioned at the very beginning: the complexity. It’s not only in the hands of the companies to just “deliver the project.” It will require managing and aligning full supply chains, resource pools, etcetera. And that is an area where many companies should start crafting a plan and a strategy for how to do that. And also do that, as we said earlier, under the time pressure.

A CEO’s strategy for change

Roberta Fusaro: What advice do you have for the CEO who needs to go about changing mindsets? How can the CEO bring people on board with all this change?

Christoph Schmitz: We believe the CEOs need to make this a C-suite topic and a nondelegable topic. That might mean that the installation of a chief technology officer is required to really anchor this on the C-suite.

Steffen Fuchs: Having that as part of your regular dialogue with the board of directors or with the management team by itself will raise the significance and the importance. We need to have a similar in-depth and fact-based conversation about what our capital costs are doing as we used to have about our cost of goods sold. And just simply making that a part of the regular management agenda will shine a light on it.

Another important point is not accepting the status quo as good enough of an answer. I think there is a role of being a bit of the chief instigator and asking for innovation and asking for what can be done differently as a means to keep pushing the ceiling and saying, “OK, what are we trying? What have we learned? What are the best practices? How do we replicate this?”

Christoph Schmitz: Last but not least, I believe there is also a new role that probably only the CEOs can take. If, and many of these projects will require this, there is a need for interaction with authorities, with governments, with regulators, and with policy makers. Again, nothing you can delegate.

I personally also believe that it might be beyond the battery limits of a company, so whole industries, CEOs, and C-suites need to go shoulder to shoulder and approach authorities and say, “Hey, how do we get this compressed? How do we get this accelerated?” So it’s totally new and probably unseen and unheard of. This is, again, a C-suite leadership requirement.

It’s really an opportunity. That should be the mindset that we carry forward and spread to the world. Let’s capture this opportunity to save our planet or at least contribute to its survival.

Segment two: My Rookie Moment with Dymfke Kuijpers

Lucia Rahilly: And now we hear from McKinsey senior partner Dymfke Kuijpers from our My Rookie Moment series about how deeply imperfect perfectionism is.

Dymfke Kuijpers: The first time I worked as a project manager, I was going to do everything perfectly. I was going to be the best leader McKinsey and those we worked with would ever see—the best problem solver and the best team leader. At McKinsey, we give one another constant feedback. And coming into the role, I’d gotten feedback that I was decent at leading clients, solving problems, and getting things done, but what I didn’t get many compliments on was how I lead people and teams. So I thought, “Now is my chance. They made me a project manager; hell, am I going to get it right!”

And I told the team that I really, really, really want to be the best people leader they ever had, their best project manager, and most appreciative of them and their development.

That went absolutely nowhere. At the end of the study, we did the feedback, and I was super excited because I had really spent time and effort on this. The feedback I got was an endless list of things that I should have done better, moments where I had missed people’s emotions: everything I had said that I would work on. I felt so bad because this was not what I had envisioned. I was going to be “Miss Perfect” on this project.

A few more projects went by, and then I got some excellent advice from one of my mentors. She said, “You’re doing this completely, completely wrong. You should not emphasize the areas that you’re not good at. You shouldn’t say, ‘I’m going to be the best people leader.’ You should say, ‘I’m good at leading clients. I’m good at solving problems. Let me use this project to help you on those dimensions.’” So that’s what I did. And it was fascinating to see that there was a 180-degree difference in the ratings after doing that.

Suddenly, I was a very good people leader, and people loved the way I coached them. What I have taken from that experience in my broader life, as well as professionally, is don’t ever try to be perfect. I am for sure not perfect. Nor is anyone. Focus much more on the things you’re really good at and that you enjoy. You amplify those, as opposed to focusing on the things you might not be perfect at.