Most capital budgeting processes are out of control. On the big decisions—the major investments—disciplined analyses of expected returns do, of course, get done. But on the countless smaller capital requests that flow up the decision-making channels of most organizations, such discipline is usually lacking. What's missing, however, is not a top-down commitment to using net present value techniques. The problem is not methodological. What's missing is a consistent management focus at the grass-roots level on identifying all opportunities to generate and capture value by using capital more efficiently.

The chief financial officer of a large, regulated company recently noticed a problem. He was seeing increased demand for capital to fund new projects at the same time that his company was suffering from a shortage of internally generated funds. Because conditions in the capital markets were unfavorable, he was not prepared to issue new debt or equity in the necessary amounts to keep the company's capital structure unchanged. So he proposed to raise the hurdle so that fewer projects would be accepted.

A reasonable solution—but somehow the CFO felt uncomfortable. Would raising the hurdle really cut the number of requests? Or would the numbers simply be "cooked" to show higher forecasted...