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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.
Representative terms from entire chapter:
facilities investments
