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3 Decision Making to Support Organizational Missions BACKGROUND Organizations are established to achieve specific goals and missions. Their level of success depends, in large part, on the effectiveness of their decision mak- ing. Every decision made by an organization is intended to make something hap- pen that otherwise would not or to prevent something from happening that other- wise would (Ackoff, 1999). Because of the sums of money involved and the long-term nature of facili- ties, major facilities investment decisions have direct impacts on many business units, operating groups, and management levels, as well as on the financial pros- pects of any large organization. Thus, multiple internal and external stakeholders are either directly or indirectly involved in and impacted by these decisions. These stakeholders typically have differing, and possibly conflicting, objectives, respon- sibilities, and levels of technical knowledge. The magnitude of the financial resources required for facilities investments precludes investment in other activities of importance and thus requires explicit trade-offs--if x million dollars are invested in facility A as requested by stake- holders 1, 2, and 3, then x million dollars will not be invested in activities B, C, and D, as requested by stakeholders 4, 5, and 6. The potential for adversarial relationships, miscommunication, and gamesmanship among the stakeholders is obvious as each group seeks to achieve its own goals and objectives. To help align the objectives, goals, and values of the various stakeholders toward achieving the organization's goals and missions, best-practice organiza- tions establish a framework of procedures, required information, and valuation criteria to support their decision making about facilities requirements. The vari- 44

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 45 ous components of the framework are understood and used by all relevant leader- ship, management levels, and operating groups, which helps to permeate a facili- ties asset management approach into the culture of the organization. For facilities investment decisions, the components of the framework include: Common terminology, A basis of shared information, Decision processes that are clearly defined and incorporate multiple deci- sion points, Performance measures, Feedback processes, Methods for establishing accountability, and Incentives for groups and individuals. Together these components support decision making related to facilities re- quirements and investments, create an effective decision-making environment, and provide a basis for measuring and improving facilities investment outcomes. This chapter features those components of a framework related to facilities requirements and investments. The roles of technical analysis and values in deci- sion making are first reviewed. The following sections discuss management ap- proaches to achieving a mission; information for decision making; and decision- making processes. Chapter 3 concludes with a summary of principles and policies from best-practice organizations. THE ROLES OF ANALYSIS AND VALUES IN DECISION MAKING There is a generally recognized five-step process to help guide decisions on issues worthy of careful thought (Hammond et al., 1999): 1. Define the decision problem. 2. Specify appropriate objectives. 3. Identify a full range of alternatives for meeting the objectives. 4. Understand the consequences of the competing alternatives. 5. Evaluate the alternatives, incorporating the necessary trade-offs. Regardless of who owns or manages them, facilities are built or renovated as a result of a similar decision process: The requirement for a facility to serve a specific function or purpose is identified. A set of objectives is developed for the facility. Different alternatives for meeting the objectives are identified. The consequences of the alternatives are estimated.

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46 INVESTMENTS IN FEDERAL FACILITIES Trade-offs are made to evaluate the alternatives. A decision is made to proceed. A number of activities are then required to implement the program and to operate a facility. Many of these activities also occur as a result of decision pro- cesses: Funding is obtained. The facility is acquired through construction, renovation, lease, or pur- chase. The facility is occupied, operated, and maintained over a period of years and sometimes renewed. At the end of its life, the facility is disposed of. Such processes appear logical and straightforward. However, in the real-life operating environments of corporations or federal agencies, where multiple stake- holder groups have a direct interest in the outcome of facilities investment deci- sions, decision making is rarely perfectly logical or sequential. Instead, decision making is likely to be interactive and iterative and to involve various stakeholder groups, who have different interests and information, at different and multiple points in the process. Furthermore, decisions of any import are not based solely on technical analy- sis. The various parties involved also judge the desirability of the outcomes of various alternatives based on their individual and organizational values--that is, what an individual, a society, or an organization aspires to achieve: the health of human beings, the preservation of an ecosystem, an improved quality of life, or the ability to carry on an economic activity. When making decisions about invest- ment alternatives, the various stakeholder groups use their values explicitly or implicitly to answer such questions as, How much of one service type should be given up to enhance another service type? How much is it worth to enhance the service quality of each type of service? Ultimately, values are at the core of all investment decisions and characterize the desirability of their consequences. For large organizations, data, logical analysis, and judgments about facts help to determine the likelihood of the consequences of an alternative. Quantita- tive analysis can help people to systematically assess the implications of infor- mation and expose biases and flaws in their reasoning (Lempert et al., 2003). However, the decision-making process can quickly result in gridlock if the vari- ous stakeholders cannot agree on the assumptions that will form the basis of the analysis. A further complication is that the desirability of the consequences will be judged differently by the different stakeholder groups based on their values. To understand how and why organizations make decisions, both types of judgments

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 47 are important and must be accounted for. Confusing fact-based judgments with value-based judgments can lead to miscommunication, mistrust, and a decision- making environment characterized by adversarial relationships and gamesman- ship (Kleindorfer et al., 1993). To help align the values, goals, and objectives of the various stakeholders, an overarching desired outcome, such as mission achievement, must first be identi- fied. The components of a framework to support achievement of that outcome can then be developed. For example, in the justice system, one overarching de- sired outcome is that anyone accused of a crime receive a fair trial. A jury of peers is assembled to decide on guilt or innocence. The prosecution and the de- fense, who have diametrically opposed objectives, work within a framework of procedures, required information, and valuation criteria to present their cases. They use a common basis of information or set of facts to build their cases, al- though they are free to reach differing conclusions. The information is deemed to be credible because it is provided under oath and penalties exist for perjury. The performance of the prosecution and the defense is measured by their success in swaying the jury to their point of view. The various arguments are tempered by a judge, who is responsible for ensuring that the appropriate procedures are fol- lowed to achieve a fair trial. Best-practice organizations similarly establish a framework of procedures, required information, and valuation criteria to meet an overarching desired goal-- achievement of mission. As noted in Chapter 2, a facilities asset management approach allows an organization to integrate facilities considerations into its stra- tegic planning processes and to forge a direct link between organizational goals, investment decisions, and operations. The next section describes some manage- ment approaches that can be used to reinforce strategic decision making. MANAGEMENT APPROACHES FOR ACHIEVING A MISSION Best-practice organizations use their mission as guidance for instituting man- agement approaches that integrate all of their resources--personnel (human capi- tal), physical capital (facilities, inventories, vehicles, and equipment), financial capital, technologies, and information--in pursuit of a common goal. Ackoff de- scribes two types of management approaches. The first, preactive planning, is a top-down, strategically oriented approach based on forecasts of suppliers, con- sumers, and competitive behavior as well as economic, social, and political con- ditions for which senior management sets organizational objectives. The tactics for meeting these objectives are left to the individual operating units. The second approach, interactive planning, is directed at gaining control of the future and consists of the "design of a desirable future and the selection or invention of ways of bringing it about as closely as possible." Interactive planning focuses on in- volving personnel from within the organization in the planning process so that

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48 INVESTMENTS IN FEDERAL FACILITIES they can "come to understand their organization and its environment, and how their behavior can improve performance of the whole, not just their part of it" (Ackoff, 1999, p. 106). Yet another management approach for integrating the use of resources is one that focuses on an organization's essential areas of expertise (its core competen- cies), which are the organizational skills that are difficult to duplicate, that create a unique value, or that constitute the organization's competitive advantage--that is, what it does better than anyone else (NRC, 2000). In this approach, functions deemed to be core competencies are assigned to an organization's in-house staff because they have the skills and institutional knowledge to most effectively perform them. In-house staff may also perform functions that support core competencies to keep competitors from learning, tak- ing over, eroding, or bypassing the organization's core competencies (Pint and Baldwin, 1997). Noncore functions that are required but not critical to an organization's competitive position--for example, janitorial services--may be outsourced to providers with expertise in that function. Using this management approach, facilities investments can be evaluated based on their support of the organization's mission and core competencies. For example, if the core competencies are research and development of new pharma- ceutical products, then laboratories and other research or manufacturing facilities can be directly linked to operations essential to the organizational mission and evaluated as mission enablers. Facilities that support core competencies--for ex- ample, administrative space required for in-house staff or noncore functions-- can be differentiated from facilities viewed as mission enablers. Level of Control and Planning Horizons When considering a facilities investment proposal, best-practice organiza- tions determine the level of control required and the planning horizon (the length of time a facility will be needed to support a particular function), which may or may not be the same as the life of the facility. Based in part on the level of control an organization wishes to exert over its facilities, it may choose to own them or lease them. Ownership allows the organi- zation to exert maximum control over a facility's condition, functionality, and operations. In choosing ownership, an organization takes a risk that if require- ments change, the facility can be disposed of without a substantial loss. It also takes on a financial commitment to operate and maintain the facility over time. However, the owner can realize financial benefits if opportunities arise to sell a property at a profit. If a facility is demolished, the owner may be able to realize some salvage value. By leasing space,1 an organization gives up some control: for example, the 1The option of leasing facilities presumes that such facilities are available in the marketplace.

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 49 lessor's approval might be needed for any modifications, or the term of the lease might affect the organization's ability to reduce costs by moving out. The lessor could also choose not to renew a lease or to offer to renew it only at a higher rate. The advantages of leasing include lower up-front capital and financing costs and less restrictive credit standards, which translate into less risk and greater liquidity (how easily assets can be converted to cash). An organization can choose to renew the lease periodically, allowing it to adjust its space needs to reflect evolving operational requirements. If the space becomes obsolete, is no longer required, or is in the wrong location to best support current operations, the orga- nization can move elsewhere, leaving the lessor to pay the costs of ownership and obsolescence. The type of lease entered into (operating or capital2 ) will depend on the type of function to be supported, the organization's financial position, its desire for flexibility, and its operating environment. Whatever the type of lease, an organi- zation cannot claim any tax depreciation benefits or realize any residual values through sale or salvage value through demolition. The General Motors Corporation illustrates one way among many of how a facilities asset management approach can be directly linked to organizational mission and strategic planning. General Motors (GM) has identified its manufac- turing plants as directly supportive of its core competencies and operating re- quirements--designing and producing vehicles. GM exerts maximum control over these specialized facilities by owning them for an indefinite period of time and staffing them with its own workforce. GM has also developed a strategy for nonmanufacturing facilities intended to provide a scalable portfolio that responds to changing business needs (GM, 2003). To leverage facilities investments, nonmanufacturing facilities have been divided into three investment and use classifications (see Table 3.1). "Commit- ted" facilities involve a long-term commitment. They are owned by the corpora- tion to allow for proprietary investments and to be used primarily by the corporation's internal staff, although contractors, suppliers, or alliance partners that support the corporation's core business may occupy some of this space. A second category is "flex facilities," which are mid-term investments that allow GM to exit from the space relatively rapidly if requirements change. Because flex facilities are designed to accommodate a range of functions and appeal to a wider audience, they can be more easily disposed of in the marketplace. These facilities are owned and used by internal and noncorporation tenants. As demand changes, the amount of space devoted to flex facilities can be increased or decreased to balance the portfolio. The third category is "buffer" facilities, which support 2An operating lease is a lease usually lasting for 5 years or less in which the lessor handles main- tenance and servicing. It may be most appropriate for short-term needs or in unstable markets. Capital leases, in contrast, are long-term leases, usually 6 years or more (Groppelli and Nikbakht, 2000).

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50 INVESTMENTS IN FEDERAL FACILITIES TABLE 3.1 An Approach for Nonmanufacturing Facilities (GM) Facility Category Planning Horizon Level of Control Tenancy Committed Indefinite Own Internal staff Flex Mid-range Own Internal staff/contractors Buffer Short term Lease Tenants noncore functions. Buffer facilities are used as space for tenants, have short-term leases, and can be easily disposed of in response to short-term business fluctua- tions. INFORMATION FOR DECISION MAKING To provide a basis for informed decision making about facilities investments, best-practice organizations foster communication among the various stakeholder groups through the use of common terminology; rigorously analyze and evaluate facilities investment proposals; and analyze ways to disengage from the proposed investment (exit strategies). Common Terminology Facilities investments typically are of a magnitude that can affect an organization's financial health: Decisions about whether to invest will impact many operating units. As noted in Chapter 1, private-sector organizations typi- cally make capital investment decisions separately from decisions regarding op- erating expenditures. Best-practice organizations use a decision-making process for capital expenditures that involves many of the operating units at some point. However, engineers, accountants, facilities managers, senior executives, finance and tax experts, and market, technology, and personnel specialists lack a com- mon vocabulary or style of interaction. Lack of a common terminology can easily lead to miscommunication about potential facilities investments and time delays that can have financial impacts. Consider the concept "facility life." Building service life has been defined as the period of time over which a building, component, or subsystem provides ad- equate performance (NRC, 1991). Design service life is the time period building owners, designers, and managers use to make decisions about maintenance, re- pairs, operations, and alterations, typically between 10 and 30 years (NRC, 1990). Life cycle has been defined as the sequence of events in planning, design, con- struction, use, and disposal (e.g., through sale, demolition, or substantial renova- tion) during the economic or service life of a facility; it may include changes in

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 51 use and reconstruction (NRC, 1991). Unless such terms are clearly defined and consistently used by all of the individual stakeholders, the potential for miscom- munication is evident. To communicate effectively across the various operating units--facilities, administration, finance, human resources, and marketing, among others--best- practice organizations establish and consistently use an agreed-upon set of terms to promote mutual understanding of the issues, risks, and possible outcomes of an investment proposal. Terms such as "capital" are clearly defined for use by all operating units in both proposal documentation and in interactive discussions so that time is not lost through miscommunication or by continually redefining the ground rules. Business Case Analysis To further enhance communication among the various stakeholders and to facilitate effective decision making, best-practice organizations use a business case analysis. A business case analysis is a tool for planning and decision making that projects the financial implications and other organizational consequences of a proposed action (Schmidt, 2003a). It links estimates of costs and benefits with expectations for projected outcomes. Although at its heart the business case is a financial analysis, it also contains information on organizational impacts that can- not be quantified in monetary terms, such as mission-readiness or fulfillment, customer satisfaction, and public image. The overriding purpose of a business case analysis is to make transparent to the various decision-making and operating groups all of the objectives to be met by a facilities investment, the underlying assumptions, and the attendant costs and potential consequences of alternative actions. All of the participating groups in a facilities investment decision use the same analysis and its various refine- ments. For these reasons, a business case analysis is designed and developed to an- swer questions such as, What are the likely financial and other business conse- quences if the organization takes a particular action? Which alternative for action represents the best business decision? Will the returns justify the investment? What will this action do for overall organizational performance? (Schmidt, 2003a, 2003b). Thus, a business case analysis is a planning and decision support tool, not a budget, an accounting document, or a financial reporting statement. Best-prac- tice organizations treat a business case analysis as a living tool, one that is being continually revisited, refined, and updated, not as a static, one-time-only case study. The format and types of analyses included in a business case analysis are not standardized: each organization determines and reaches general agreement on the types of data, analyses, and methodologies to be used and how that information will be presented. These components are strengthened over time through repeated

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52 INVESTMENTS IN FEDERAL FACILITIES use. The credibility and value of the analyses and methodologies are improved by understanding the types of information that are useful in differentiating the con- sequences of various alternatives. Financial and other quantifiable objectives, together with objectives that are difficult to place a dollar value on, such as improved employee morale or im- proved corporate image, are identified up front. Because some assumptions and data underlying a proposal will be subjective and time sensitive (e.g., interest rates), the sources of all information related to business trends, future interest rates, inflation, salaries, and the like are documented. To provide credibility and accountability, the persons or business units that developed the proposal are iden- tified (Schmidt, 2003b). Best-practice organizations recognize the interrelationships among their people, places, other physical assets, technologies, information, and funds: A change in the character, size, or amount of any one of these resources will impact the other resources and the organization's ability to meet its goals and mission. In a business case analysis, such organizations analyze the life-cycle costs of a spe- cific facility investment proposal and of the attendant staffing and equipment, and they look at alternative uses of the required funding over the appropriate planning horizon. They include the costs to finance the investment, the potential costs and benefits of disposal, including sale and salvage value, the costs of tech- nology, and operational requirements. These analyses allow decision makers to better understand the potential consequences of facilities investment decisions and to make informed choices in regard to owning, leasing, reinvesting in, or constructing facilities. Pro Forma Statement At the heart of the business case is a pro forma statement that is essentially a financial analysis. A number of standardized, repeatable, analytical measures are typically used. These include net present value, internal rate of return, discounted cash flow, return on equity, return on net assets, and earnings per share.3 The metrics chosen are those that best represent the values of the organization. Once developed, these metrics can be used to determine the cost of ownership, the benefit/cost ratio, or the cost-effectiveness index--all important decision-making criteria. The financial information and assumptions used to develop the business case analysis must be carefully explained and documented because, owing to the compounding (or its reciprocal, discounting) effect of interest rates, all of the 3 Return on investment is not a standardized, analytical measure; instead it is a concept whose definition varies by organization and discipline. Organizations using the term "return on investment" must clearly define how it is being used and how it is being calculated (Schmidt, 2003a).

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 53 financial metrics mentioned above are highly dependent on time and the cost of borrowing. For example, if the prevailing interest rate is 3 per cent, then a dollar either received or expended 5 years in the future is worth only $0.78 today (its "present value"), and a business case analysis must be careful to express all monetary costs and benefits in similar terms. As interest rates rise or the period of analysis lengthens, the present value of future costs or benefits decreases sharply. For example, if interest rates are 8 per cent, the present value of a dollar received or expended in 20 years is only $0.21. Even though the objectives of capital investment in the public sector differ from those of the private sector, the impact of time and interest rates on public-sector investment decisions is equally powerful. Several types of financial analyses can be used to evaluate a particular ac- tion. Three with applicability to the public sector will be discussed here: cost of building ownership, benefit/cost, and cost-effectiveness. Cost of Building Ownership The cost of ownership of a building has been defined as the total of all expen- ditures an owner will make over the course of the building's service lifetime (NRC, 1990). The cost of ownership typically will include planning, design, and construction (first costs); maintenance, repairs, replacements, and alterations; normal operations such as heating, cooling, and lighting; and disposal. These costs are also referred to as life-cycle costs. Benefit/Cost Analysis A common method of selecting among alternative investments is to deter- mine the ratio of a project's total benefits to its total costs--that is, the benefit/ cost ratio. A benefit/cost ratio greater than 1.0 indicates that the benefits of the project outweigh the costs, while a ratio less than 1.0 means the opposite. Obvi- ously, the higher the ratio for a particular alternative, the more attractive that project will be relative to other competing projects. Using benefit/cost analysis requires considerable care because the costs and benefits will be experienced at different times and their magnitudes may vary considerably. For example, in a building project, the relatively large first costs will be experienced early in the project's life and followed by smaller recurrent costs for maintenance, opera- tions, repair, and replacement. Benefits generally will be small or nonexistent initially but may accrue to fairly large values late in the life of the project. Al- though the costs and benefits can be discounted to a single present value, doing so will require multiple assumptions about interest rates, timing, and the future val- ues of these elements. Despite these cautions, benefit/cost analysis can be a pow- erful tool for evaluating alternatives.

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54 INVESTMENTS IN FEDERAL FACILITIES Cost-Effectiveness Analysis Benefit/cost analysis is predicated on the ability to express benefits in mon- etary terms, either as a cash inflow or a cost avoided. However, when only the cost side of a project can be quantified (as is often the case in public capital investment decisions), an alternative means of analysis and comparison is re- quired. Cost-effectiveness analysis was developed as a means of evaluating envi- ronmental projects where, for example, the benefits of enhanced air or water quality or the value of wetlands were difficult or impossible to quantify accu- rately in monetary terms. In these cases, performance objectives were established for the action, and the project that met all desired objectives at the lowest cost was considered the most cost-effective. Despite mixed success with efforts to mon- etize environmental benefits, cost-effectiveness analysis is a useful business case tool when only the costs of a project are well defined. Exit Strategies To provide important insight about the potential consequences of investing in a long-term, nonliquid asset like a facility and to select the best alternative to meet the requirement, best-practice organizations typically develop and evaluate exit strategies--methods for disengaging from an investment--as part of the busi- ness case analysis. A commonly analyzed and implemented exit strategy is to lease the required space in the first place. If requirements change, an organization can move out of leased space relatively quickly without the burden of selling or otherwise dispos- ing of the property. In some cases, leased space may have a higher annual cost per square foot than owned space. However, it may still make economic sense to lease to ensure that the organization can divest itself of the space on short notice. For space that is to be acquired through purchase or construction, one exit strategy is to build flexible (generic) space that can be relatively easily adapted to other uses to meet changing requirements. Flexible office or warehouse space generally has wider appeal to potential buyers or those willing to sublease excess space; this can mitigate the risk of selling it at a financial loss and increase oppor- tunities for selling it at a profit. Johnson and Johnson, for example, builds its biopharmaceutical facilities using flexible floor plans. With rapidly changing markets and an 8-year-long Food and Drug Administration approval process, the risk is considerable that when a project is completed, it may be outmoded or its intended product lines will not gain approval. Johnson and Johnson mitigates the risk by constructing facilities that can be relatively easily adapted to new uses or different product lines. The Toyota Corporation takes a different approach, build- ing in flexibility by constructing large facilities that are similar to one another in order to accommodate a broad range of uses and to reduce surprises--a portfolio approach.

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 55 Timely maintenance and repair of an owned facility can also be evaluated as an exit strategy: Investment in maintenance and repair retains or improves the functionality and performance of a facility, thereby increasing its marketability and its residual value at the time of sale. As the merits of a proposal are evaluated, the costs and benefits of leasing versus owning, of developing flexible facilities, and of maintenance and repair, as well as the projected residual value, are analyzed to provide quality informa- tion for decision making. Tishman Speyer Properties, for example, develops and evaluates at least two exit strategies for every proposed investment. For some specialized facilities, such as those for manufacturing, power gen- eration, defense or military use, and some types of research, the only exit strategy may be demolition, cleanup, and disposal. A particularly strong rationale is needed for investing in such facilities, such as a direct link to the core business lines and missions of an organization, and the cost of the intended exit strategy must be made explicit in the initial proposal. This exit strategy is evaluated to provide information about the total costs involved and to provide insight into design and operation practices that may lead to lower demolition and cleanup costs. For ex- ample, the use of biodegradable materials for a facility may result in lower dis- posal costs, or special waste disposal methods may be indicated. DECISION-MAKING PROCESSES In private-sector organizations, decisions about facilities investments are typically made by a senior executive-level group--an investment committee, a management committee, a group of senior vice presidents representing all of the operating units, or the board of directors. This decision-making group is respon- sible for ensuring that facilities investments are integrated into the overall organi- zational strategy. The decision-making body reviews a proposal at several stages of development. Each stage represents a decision point at which the reviewing body will decide if the proposal should be given conditional approval and consid- ered further or if it should be terminated (go/no-go determination). Funding thresholds are established to determine the level at which a proposal will be reviewed--the greater the cost or potential impact, the higher the level of management review. The board of directors may make the final decision about investment proposals with potentially significant impacts on the organization's cash flow, productivity, or competitiveness; in this case, an executive-level re- viewing body will forward the proposal to the board as a recommendation rather than a decision. Minimal resources are invested at the earliest stages of proposal evaluation, and the business case analysis is likely to focus on the financial aspects of the proposal, the pro forma statement. As a proposal receives conditional approvals, and as additional resources are committed, more detailed analyses are under- taken, and the business case documentation becomes more complete until the

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56 INVESTMENTS IN FEDERAL FACILITIES proposal becomes an actual project. Once final approval for a project is received, it is usually put on a fast track so that the resulting facility can be functional as soon as possible. Throughout the process, information is continually gathered, refined, docu- mented, and updated. Decisions are continually revisited to determine if modifi- cations are needed in response to changing requirements. All significant deci- sions are documented to create a decision record that can be archived and revisited. Such a record creates an institutional memory and allows the organiza- tion to save time when reevaluating a decision and when orienting people to the project as leadership and managers change. Figure 3.1 depicts a typical process for facilities investment decision making used in best-practice organizations. The following text elaborates on individual elements of this process. Identify requirement Operating group develops preliminary proposal Present to Decision-making No-Go Tied to strategic plan Process Ends entity Screening criteria Preliminary analysis Conditional Minimal resources approval invested Analyze alternatives Recommend Portfolio impact development strategy to Decision-making No-Go Scenarios: buy/lease/build Process Ends entity Total cost projections Exit strategies Conditional approval Present Final detailed proposal to Decision-making No-Go Process Ends analysis entity Go Fast-track project FIGURE 3.1 Typical decision-making process for facilities investments.

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 57 Identifying a Facility Requirement In a best-practice organization, a proposal involving a facility investment may come from any of the operating units within the organization. The proposal must be tied to the organization's missions, organizational objectives, long-term or rolling capital plan, and sometimes to an individual business unit's annual plan and goals. It also must meet established screening criteria (e.g., opportunities to make money, avoid costs, improve customer satisfaction, improve product deliv- ery, or create operating efficiencies). Typically, a facility investment proposal is presented as an opportunity for the organization to make or save money, avoid costs, or comply with regulations. Opportunities for making money might occur where there is a facility require- ment tied to an increased demand for a good or service attributable to increases in population, increases in income, or an influx of new businesses. Opportunities for saving money might be realized by creating operating efficiencies, by making improvements that minimize the potential for accidents or other liability actions, by replacing an obsolete facility with one that is state of the art, by consolidating facilities, or by disposing of facilities that are no longer needed. Costs might be avoided by incorporating nontoxic or recyclable materials in a building to avoid the additional expense of disposing of hazardous materials at demolition. Or, an investment might be proposed to comply with regulatory requirements, local building codes, environmental standards, or new mandates. At this initial stage, the level of analysis must be sufficient to determine whether the proposal has merit, without incurring significant time and resources. A pro forma statement might include the underlying assumptions, preliminary estimates of internal rate of return, cash availability (expected costs and cash flow), ledger impact (depreciable expense), and asset burden (tax flow), as well as judgments about the potential impact on the organization's operations, market risk, and opportunities. In private-sector organizations, an earnings per share analysis might be included to demonstrate the impact on profits and earnings. At this stage, the information presented is high level and succinct, and the pro forma may include some "plug in" numbers. The business case analysis may be limited to the vision, the opportunity, the long-term benefit, a plan, and a net present value analysis comparing the life-cycle cost of a lease with the life-cycle cost of owning a facility. An investment proposal is presented to the reviewing body by its organiza- tional "owner," typically the head of an operating unit that has a stake in its successful outcome. The reviewing body will decide if the proposal has merit and should be conditionally approved pending additional analysis or if it should be terminated (no-go).

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58 INVESTMENTS IN FEDERAL FACILITIES Recommending a Development Strategy If conditional approval is given, more detailed analyses are undertaken as the business case is developed. Typically, however, a wide range of alternatives for meeting the requirement will be developed, including an alternative for not mak- ing a facility investment. The organization will also analyze how it can fulfill the requirement by squeezing production capacity out of the existing portfolio of facilities or meeting it through other, nonfacility alternatives, such as outsourcing. It will identify facilities in the portfolio that might become obsolete to the mis- sion, underutilized, or overutilized if the proposal is implemented. If these analy- ses indicate that additional facilities are required, alternatives for buying, leasing, or building them and for disposing of facilities that are no longer required will be evaluated. The life-cycle costs of all required resources (operating, staffing, in- formation technologies, financial, facilities) are projected for each alternative. What-if scenarios or sensitivity analyses that change the assumptions about a proposal are used to aid in deliberation and decision making. Scenario develop- ment and evaluation can identify a range of situations that are sufficiently plau- sible and then evaluate their relative risks, costs, and benefits related to cash flow, profits, life safety (e.g., accidents, injury, fire, earthquakes) and security, envi- ronmental impacts, and the like. If the original proposal does not meet the invest- ment objectives, its scope may be changed to consider the effects of a lower-cost alternative. All of this information is returned to the appropriate reviewing body. The level of information presented must be sufficient for all the decision makers to understand the trade-offs involved in choosing one alternative over another. At this decision point, the reviewing body may narrow down the alternatives, re- quest more analysis, or terminate the proposal. A final, detailed business case analysis is then completed. The required in- formation may be prepared by cross-functional teams, individual business units, contractors, or some combination of these, depending on the culture and resources of the organization. The numbers are validated by the various operating units, including the facilities management group. In some cases, an independent third party may be hired to verify the numbers. Based on this information, a develop- ment strategy is recommended. The proposal is again taken to the reviewing body for a go/no-go decision. Time Frame and Continuous Evaluation On paper, such a process appears to be lengthy and time consuming. In prac- tice, executive-level committees of private-sector corporations meet as often as once a week. Even if a proposal goes to a reviewing body four or more separate times, it may take less than 6 months to move from initial review to final ap- proval. It is not uncommon for a proposal to go from the planning process to occupancy of the resulting facility in less than 3 years. In many cases, projects are

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 59 linked to the production schedule of a new product or service, so the timeline is set by the schedule for production or service availability. Project implementation may be delayed if there is a change in the external operating environment, such as a change in interest rates, if a tenant must be committed to a project before construction begins, if a rezoning approval is needed, or if difficulties arise in bringing a contractor on board. If the operating environment changes substantially or significant time elapses before the project can be initiated, best-practice organizations reevaluate the decision to approve the project and determine whether to proceed or cancel it. PRINCIPLES AND POLICIES FROM BEST-PRACTICE ORGANIZATIONS Based on a consolidation of research, interviews, briefings, and the commit- tee members' individual and collective experience, the committee found that best- practice organizations that successfully manage facilities investments operate under a number of principles and policies in their decision making (all 10 prin- ciples/policies are repeated in Chapter 6): Principle/Policy. Best-practice organizations establish a framework of procedures, required information, and valuation criteria that aligns the goals, objectives, and values of their individual decision-making and op- erating groups to achieve the organization's overall mission. The com- ponents of the framework are understood and used by all leadership and management levels.4 In large organizations, significant facilities investment decisions typically entail millions of dollars and have direct impacts on many divisions, operating groups, management levels, and budgeting processes. Multiple internal and ex- ternal stakeholders with differing objectives, responsibilities, and levels of tech- nical knowledge are impacted by these decisions and the trade-offs required. To align the values and objectives of all relevant decision-making and oper- ating groups, best-practice organizations establish a framework of procedures, required information, and valuation criteria to support effective decision making. Components include common terminology, a business case analysis, and evalua- tion processes that are clearly defined and involve multiple decision points. Principle/Policy. Best-practice organizations integrate facilities invest- ment decisions into their organizational strategic planning processes. Best-practice organizations evaluate facilities investment proposals as mission enablers rather than solely as costs. 4This principle/policy and the principle/policy in the Executive Summary and at the end of Chapter 4 together form Principle/Policy 1 in Chapter 6.

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60 INVESTMENTS IN FEDERAL FACILITIES Best-practice organizations institute decision-making and management ap- proaches that integrate the use of all of their resources--people, financial, facili- ties and other physical assets, technologies, and information--in pursuit of mis- sion achievement. They evaluate facilities investment proposals as mission enablers rather than solely as costs: Investments in facilities are typically made to ensure that business operations are continuous and efficient, essential ingredients to an organization's success. Executive-level managers from all of the operating units are responsible for reviewing facilities investment proposals, making deci- sions about their viability, and ensuring that facilities investments are integrated into the organization's overall strategic planning processes. Principle/Policy. Best-practice organizations use business case analyses to rigorously evaluate major facilities investment proposals and to make transparent a proposal's underlying assumptions; the alternatives con- sidered; a full range of costs and benefits; and the potential consequences for their organizations. A business case analysis is a planning and decision-support tool used to en- sure that the objectives for a proposed facility-related investment are clearly de- fined; a broad range of alternatives for meeting the objectives is developed; the alternatives are evaluated to determine how well the objectives will be met; and trade-offs are explicit. It is a living tool that is continually revisited, refined, and updated throughout the decision-making process. Principle/Policy. Best-practice organizations analyze the life-cycle costs of proposed facilities, the life-cycle costs of staffing and equipment in- herent to the proposal, and the life-cycle costs of the required funding. Best-practice organizations recognize the interrelationships among their people, places, physical assets, technologies, information, and funds: A change in the character, size, or amount of any one of these resources will have impacts on the other resources and the organization's ability to achieve its mission. Within a business case analysis, best-practice organizations analyze the life-cycle costs of proposed facility investments in addition to the first costs (design and construc- tion), the costs of financing the investment, the potential costs and benefits of disposal (sale and salvage value), and life-cycle costs and benefits related to staff- ing, technology, and operational requirements. Principle/Policy. Best-practice organizations evaluate ways to disengage from or exit facilities investments as part of the business case analysis and include disposal costs in the facilities life-cycle cost to help select the best solution to meet the requirement. Best-practice organizations typically consider how they can disengage from a proposed investment (exit strategy) at the same time they are determining

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DECISION MAKING TO SUPPORT ORGANIZATIONAL MISSIONS 61 whether or not to proceed with it. Commonly analyzed and implemented exit strategies include leasing rather than owning the required space; acquiring flex- ible or generic space that offers more options to the owner and that might appeal to a wide range of potential buyers; and timely maintenance and repair, which increase a facility's marketability and residual value at the time of sale. For those facilities where the only viable exit strategy is demolition, cleanup, and disposal, the costs of the activities are estimated for the business case analysis; these pro- jected costs, in turn, may influence the eventual design of the facility, choice of materials, and methods of operation. Principle/Policy. Best-practice organizations base decisions to own or lease facilities on the level of control required and the planning horizon for the function, which may or may not be the same as the life of the facility. When considering a facilities investment proposal, best-practice organiza- tions determine the level of control (own or lease) they wish to exert over facility conditions and operations based on the function's importance (core competency or noncore function). They also consider the planning horizon--the length of time the property will be required to support a particular function, which may or may not be the same as the life of the facility.