Capital Investment Planning and Budgeting

Once management has used portfolio strategies to identify capital asset(s) that should be refurbished or replaced, a business case must be prepared to identify the most cost effective, most beneficial, and least risky course of action. Facility managers can work with organizational leadership to develop business cases to systematically consider capital asset upgrade financial costs, qualitative and quantitative benefits, and risks by project alternatives. Each alternative is evaluated independently and then compared side by side to facilitate management decision making. Typical outputs include Net Present Value (NPV), Return on Investment (ROI), Internal Rate of Return (IRR), and Payback Period. Qualitative factors are displayed graphically to show the level of expected benefits and possible risks.

After the business case has been made, numerous capital investments profiles can be developed to optimize capital asset condition/performance. By combining deferred maintenance, capital asset design life, and year of last replacement, NIH leadership can use different capital funding profiles to determine the resulting impact on capital asset condition and, therefore, capital asset performance.

• By combining deferred maintenance, capital asset design life, and year of last replacement, managers can use different capital investment funding profiles to determine the resulting impact on capital asset condition and, therefore, capital asset performance.
• To achieve desired capital asset performance, capital investment must not only be steady, but also high enough to make an impact.

The adaptation of the National Park Service (NPS) comparative evaluation approach toward optimizing fiscal and facility stewardship capability provides the decision-enabling capacity to successfully implement and sustain an enterprise-wide, facility portfolio investment planning and management program.

Implementation and Execution

Once a decision is made to pursue capital investment, innovative procurement approaches and robust program management capabilities are required in the acquisition, operations and maintenance, and disposal of capital assets. Projects should be tracked by measuring cost, schedule, and technical progress, which could be accomplished through earned value management.

For existing capital assets and after investments are made, to keep capital assets running at optimum levels, an appropriate maintenance regime will ensure that the value of capital asset management is maintained. For the most critical capital assets, facility managers should go beyond planned or even predictive maintenance programs and strive for mature maintenance processes such as reliability centered maintenance (RCM), Figure H.1. RCM yields the highest level of equipment reliability for the least amount of maintenance expense. RCM can be the most cost-efficient maintenance program—it eliminates unnecessary equipment maintenance or system overhauls. However, RCM may have significant start-up costs associated with staff training and equipment needs (Gurumeta, 2007).

FIGURE H.1

Reliability Centered Maintenance. SOURCE: Courtesy of David Baglee, University of Sunderland.

Performance Assessment and Improvement

To be truly successful, the organization must embrace performance measurement from top to bottom. Organizations that have used performance measurement as a management tool for improved results have employed many of the following practices:

• Periodic performance reviews at various levels within the organization,
• Budgeting based on performance measures,
• Communication of measurement results throughout the organization,
• Participation in measurement and strategy development and refinement by a wide cross-section of the organization,
• Identifying best practices and sharing across the organization,
• Using technology to facilitate data analysis and regular reporting, and
• Providing incentives to reach performance goals.

Meaningful measures should track to the strategic goals of the organization. Some measures are for senior managers to assess performance; others are more specific to particular business areas. Measures should encompass different perspectives to get a true picture of the organization's performance (e.g., financial, customer, or process). Some common performance measures are shown in Table H.1.

TABLE H.1

Snapshot of Common Measures.

Capital Asset Management Enabling Technology

The adaptive integration of IT-enabled analytical capabilities affords an opportunity to get a collective view of the capital asset inventory and attribute data, as well as its capital asset measured performance within the context of organizational goals, from individual facilities to the entire enterprise's portfolio. This integrative capital asset planning and management capability provides visibility to the information, enabling a better understanding of the facility's capital asset's current performance capability and short- and long-term life cycle costs. It further provides information that can be used to determine user-introduced funding scenario impacts and create multiyear capital investment plans and budgets based on requirements, funding expectations, or both. The resulting enterprise-wide data analysis and decision-making capability will empower facility professionals to confidently perform the gap analysis used to advocate for investment program funding required for making changes to the organization's facility capital asset portfolio, based on near- and long-term mission (or business) priorities. Data-driven, informed determinations should provide the organizational leadership with confident program investment recommendations that will maximize facilities capital asset performance and value, as critical enablers of organizational business operations.

Employing a Balanced Scorecard (BSC) framework could help NIH to comprehensively translate its strategic objectives into coherent sets of performance metrics used to provide feedback on resulting activity outcomes.

Recognizing core facilities are key elements in the research portfolio of academic and private research institutions, a study performed to promote and encourage the use of assessment tools used for evaluating the need and effectiveness of core facilities performance, with respect to the strategic planning process. The results determined that the need for strategic planning, as an enabler of core facility performance, is driven by two factors: (1) aligning institutional strategic goals with investment in core facilities and (2) ensuring that this investment is sustainable (Turpen et al., 2016).

Adopted by 50 percent of Fortune 1000 companies in North America in addition to 40 percent of companies in Europe employing a variant (Yu et al., 2009), the BSC system translates an organization's strategy into action, and becomes a key input used in aligning facility management strategy to organizational strategy. The system connects the dots between big picture strategy elements such as mission (our purpose), vision (what we aspire for), core values (what we believe in), strategic focus areas (themes, results and/or goals) and the more operational elements such as objectives (continuous improvement activities), measures (or key performance indicators, or KPIs, which track strategic performance), targets (our desired level of performance), and initiatives (projects that help you reach your targets).

The BSC provides the facility management staff with information on how the entire organization is performing. It is “balanced” because a well-developed BSC highlights a change that is often balanced by an opposite reaction elsewhere in the system. The entirety of the NIH corporate enterprise—comprised of institutes, centers, program offices, finance, facilities, and other support functions—can be viewed through the BSC perspective to develop metrics, collect data, and analyze options that can transform facility and real estate requirements identified in the strategic, master, or annual facility plans into outcomes with measurable performance outcomes. The BSC serves as a means of reporting to senior leaders and stakeholders how facility management supported the accomplishment of NIH goals and objectives. An illustration of the logic behind the BSC is shown in Figure H.2.

FIGURE H.2

Balanced Scorecard. SOURCE: Reprinted with permission from Balanced Scorecard Institute, a Strategy Management Group Company. Copyright 1997 -2019.

Conclusion

At one time, the best practices in capital asset management were limited to inclusion during design and construction phases of the facility life cycle, and the focus on performing effective preventative and corrective maintenance operations did not occur until after the newly acquired capital asset was commissioned into service. Over time, the understanding or capital asset management has grown to be very sophisticated (IWR, 2013).

Government and commercial businesses with substantial physical capital assets are developing capital asset management strategies to help them make critical decisions about when and where to invest, to optimize the life of their existing capital assets and to prioritize funding to handle present and future customer demands. Benefits derived for increased use and maturity include the following:

• Increase the efficiency and effectiveness of real property services.
• Reduce the cost of operations and maintenance.
• Increase facility end user satisfaction.
• Ensure that capital assets are better sustained for the long term.
• Ensure that the organizational missions are supported.
• Allow scarce resources to be distributed to those areas that have the greatest need.
• Mitigate potential risks of audit by oversight agencies.

The integration of the facility capital asset management principles and practices into the strategic planning process better enables making capital need decisions resulting in the efficient, effective, and economic delivery of facility and infrastructure capabilities to support organization goal obtainment. It also empowers FM leadership with the ability to answer core questions that address how best to manage facilities to achieve greater efficiency and effectiveness:

• What inventory of facilities and equipment does the organization control (“as-is” portfolio)?
• What is the condition of each facility and its related equipment?
• What level of funding is required to properly sustain the facilities and equipment portfolio over time?
• How does one determine when it is best to divest instead of continuing to invest in a facility?
• Which facilities and equipment projects are the highest priorities, and where should the organization focus resources?
• How should the organization monitor the performance of its capital assets over time and better integrate the budgeting process for these capital assets with their performance?