Facilities Budgets have always been limited to the actual operating costs of the department which means that purchasing decisions are based on the savings / benefits in direct proportion to the amount of money available in the Facilities Budget. Achieving this hurdle rate – or ROI is the basis for accessing the viability of competing demands for scarce capital. For certain acquisitions, this is the correct method. However, there are acquisitions made by Facilities that, although primarily used by facilities personnel, have a far greater economic value to the university as a whole. As such, its acquisition costs (and the financial and societal benefits derived) must be considered in a much wider context.
A classic example of this is the software required to plan, maintain and operate campus infrastructure (commonly called Integrated Workplace Management Software, or IWMS). Although this software is resident within the Facilities Department and is used mainly by those employees, the campus wide benefits derived from implementation far outweigh the benefits that add directly to the facilities group.
Attempting to develop a defensible ROI based on cost as percentage of the facilities budget will invariably result in a multi-year payback — and Finance will invariably find other programs and initiatives that achieve a quicker payback at a higher ROI that are “core” to the University’s business. Failing to implement an IWMS solution because of this ROI method will result in significant increased costs of infrastructure management and facilities services in future years. These will be by reducing or eliminating the “quick payback” core programs, ultimately impacting the institutions long term viability and competitive edge.
Facilities Leaders must change the decision-making paradigm used by Finance and Administration by demonstrating the campus wide benefits of an IWMS solution. This requires understanding what your true total costs of operations are and what the true benefits are.
This requires the development of a Total Cost of Ownership (TCO) model.
This model will build a defensible argument for implementing an IWMS system and will also demonstrate the risk cost of not pursuing.
Total Cost of Operations
What makes up the total cost of operations? Certainly not what is contained within the facilities budget. This is just a fraction of the costs spend each year to keep the doors open.
The total cost of operations should take into account all organizational, operational and infrastructure data. Since sustainability is becoming business as usual, the total cost of operations should also include the carbon impact of operations. This also includes the carbon impact of students and staff traveling to and from campus. In determining the total cost of operations, analysts need to consider the following information at a minimum.
- Size of the campuses portfolio
- Acreage of grounds
- Number of Students
- Number of Staff and Faculty
- Number of Facilities Personnel broken down by position/ trade
- Number of Facilities Management
- Number of owned vs lease facilities
- Financial Data
- Actual, imputed/ implied rent
- Facilities Staffing costs
- M&O budgets
This information above can be obtained from internal records. Base rent is defined as actual rent paid plus the implied or imputed rent cost of owned facilities. You may need the services of a professional appraiser if you do not already have this information. Note that the total occupancy cost per square foot is considerably higher than the base rent per square foot. This cost is increase dramatically in areas of higher property costs (e.g. NYC, etc).
The total cost of operations also includes the actual facilities budget including real and implied rent and cost of fixed assets as shown below. The facilities budget typically is broken up as follows:
- Life Safety
- Projects (non capital)
- Space planning
- Employee Amenities
- Rent and Escalations
- Cost of Fixed Assets
Fixed Asset information is generally obtainable from your general ledger. These costs are ones directly attributable to staff and faculty (as classified under a CIP code). Student asset costs are not covered as Facilities has no impact on them. IT will generally monitor such assets separately.
If an accurate asset survey is conducted each year, you will find there are a percentage of assets that do not get used year to year. Industry standards indicate that this is around 6% per year. Additionally, an accurate annual survey will determine your asset loss (theft, accidental loss, misplacement etc). Industry standards indicate that this is around 2% per year.
The final set of inputs is probably the easiest set of information to obtain. These directly relate to the Facilities Department and include all of their internal costs and data and include such items as:-
- Total number of work orders performed per year
- Operational time per work order
- Work order management costs (overhead)
- Reporting time and cost.
Work Order management costs are those that are incurred in opening and closing a work order. This a non material, labor costs only. These work orders also include the service requests that originate with non-facilities personnel. A cost of doing business is the amount of time you and your staff spend running reports for field use or management. Past analysis of higher education facilities departments show that about 75% of facilities personal are involved in producing some form of reporting each month and that these reports account for around 2 hours per week of time –even with CMMS systems in place. This is due to the fact that most reports need to get data from a variety of sources and unless the CMMS system contains this information – generally spatial, financial and sometimes human resources, them obtaining that information and integrating it into reports can double this time.
You also need to enter the sunk costs of your current system into the mode. This may or may not be required depending on your Finance group, but since it was used in maintaining facilities to date, it is a part of operational costs and should be included. These sunk costs include the initial license fee and any software purchase to support it since, the implementation costs, cost of training and annual maintenance and any consulting fees associated with the software package. If you purchased hardware to support your current solution and will not be using it going forward, you need to include this cost as well.
This is the basic amount of information required to determine the actual operational costs for your university. Once established, you can begin to determine the costs of a new IWMS system and the financial benefits it delivers
Cost Savings/ Avoidance
Facilities can contribute to cost savings in greater ways that just by trimming its budget. Real estate and facilities costs are generally only second to HR costs, so it stands to reason that Facilities Operations has a lot of potential for cost savings. To be able to save money means understanding what you are spending money on. This presupposes the need for information and the ability to manipulate it. Since a university is full of disparate information databases, it is obvious that a solution must be found that allows users to view all of this information quickly and determine actions based upon it. This is the premise of an IWMS system. It is integrated within itself and to other systems. It tracks and manages information pertaining to the workplace (real estate, assets, facilities, etc) and it is a management information system which allows user to manipulate data, generate reports and develop strategies. IWMS systems can give Facilities Leaders an edge by forecasting need, highlighting areas of opportunity and managing costs.
The four major areas of cost savings within Higher Education are:
1) space utilization savings
- reduction in vacancy
- space optimization
- relocation and construction costs
2) maintenance and operations savings
- reduction in word order processing costs
- reduction in maintenance costs
3) real estate and asset savings
- reduction in lease costs
- reduction in asset costs
4) environmental savings
- reduction in carbon emissions
- reduction in carbon trading costs
CMMS systems cannot deliver this scale of savings as they only account for the “care and feeding” side of operations and were never designed as a strategic management tool. Some CMMS systems have develop bolt on pseudo CAFM technology which provides a limited degree of space optimization capability. CMMS systems by themselves will deliver about 30-40% of the savings about the same cost as an IWMS system. This means that the purchase of an IMWS system will deliver greater savings for a far greater ROI and much faster payback.
Space Utilization Savings
Universities, by their nature, have a lot of space. It is not unusually for a 10,000 student campus to have over 4 million square of space and several hundred acres of grounds. Physical facilities, like personnel and financial assets, are resources to be planned, managed and maintained in line with the universities strategic objectives. The goal of space planning, management and allocation is to make the best possible use of these assets and to plan for future needs. In order to assess whether space is being used effectively, space standards are generally used to determine true need against actually provision. When this equation is out of kilter, the university has a space under-utilization problem and this can account for a significant sum of money in terms of actual expense and lost opportunity.
Additional savings can be made from embracing alternate workplace practices and flexible work policies among staff and faculty and via multi use accommodation strategies for student (classroom) environments which increase space utilization and reduce occupancy cost
Using the above example of a 10,000 student campus and assuming a very modest improvement in space efficiency of 1% per year, it is possible to achieve savings over around $3.0 million over 5 years. When combined with other savings (relocation, construction, etc), we can start to achieve savings of around $4.5 million over the same time frame – or about 6% of the total cost of operations.
Maintenance and Operations Savings
Maintenance and operational expenditure comprises a number of areas:-
- Life Safety
- Rent and Escalations
- Salaries and Benefits
Assuming a total cost of operations of $70 million per year (very average), a modest 3% improvement across the board would generate savings in excess of $5 million to $10 million over 5 years – more than enough to cover some universities’ budget short falls
A three percent reduction is not hard to achieve. Adding IWMS technology to your campus has been demonstrated to deliver improvements of up to 10% to 15% in some areas of operation adding significantly to your savings.
An IWMS solution can be used to automate many of your workflows and process, stripping time and costs. Examples include automated work order creation, assigning, tracking and closing based on your operating parameters; reduction in labor costs due to automated meter reading; reduction in utility costs due to alignment of utility usage to need, and so on.
Real Estate and Asset Savings
As universities grow, their demand for space increases. Most times, this additional demand can be met through new capital projects on campus or repurposing of existing facilities. However, more and more universities are finding that space demand is exceeding current and projected on-campus supply. This necessitates purchasing or leasing off-campus property. With the acceleration of distance learning, remote campuses are becoming more important. This type of campus is suited to leasing which allows for universities the flexibility to quickly adjust to change and maximize service delivery without the long term holding costs of ownership.
Facilities Leaders are now required to have property management skills which includes leasing. As profession property management firms know, one of the most costly areas of leasing is forgetting to act on lease renewal dates. The monthly holdover charges can exceed 200% of base rent plus penalties. Missing critical dates for renewing, taking up or divesting space based on poor planning accounts for a significant sum of money. It is not uncommon to see missed renewals of up to 5% of the portfolio.
By using incorporating and IWMS system into your operations, you can accurately track lease information and make informed decisions based on supply/ demand planning linked to HR, Space and Financial databases.
Using our previous 10,000 student campus example, an assuming an 81% owned/ lease ratio (see IFMA’s Benchmarking report #30), we end up with about 680,000 sf of leased space. Assuming just a 1% improvement per year this delivers savings of around $640K over 5 years. One percent is just being smarter about the way you do things now. An IWMS system can start delivering improvements of more than 5% per year meaning savings have grown to more than $670K per year!
In large organizations, all assets suffer from inactivity and also from shrinkage (loss). Accurately tracking usage and ownership of assets increased accountability and greatly reduces inactivity (people need to justify their use of the asset) and shrinkage (when a person or department knows it is responsible for an asset it is less likely to go missing). In our example a 1% reduction in inactivity and a 10% reduction in asset loss per year results in savings or more than $130,000 per year.
Sustainability is now recognized as a standard business practice – business as usual. Universities are being rated by their leadership in this area and Campus Leadership are looking to Facilities Management to develop programs that deliver and/ or enhance “green economics” and can measure their performance and modify their behaviors.
Transportation (to and from site) is perhaps the easiest way to reduce carbon emissions, generate carbon trade cost savings and help a university not only meet environmental targets but also show commitment to an increasing important area.
In our example of a 10,000 student campus there would be about 1350 staff and faculty of which the greater majority would use public transport (about 80%). Assuming some industry and EPA averages, about 600 tons of CO2 are expelled each per month. By implementing flexible workplace practices which reduce the number of days travelled by 10% (a moderate amount), it is possible to save over 700 tons of CO2 per year (or about $22,000 in Carbon Cost).
Savings in emissions can be exponentially increased by changing behaviors and implementing sustainable business practices such as:-
- Improving energy efficiencies through smarter technologies.
- Adopting a clean and renewable energy policy
- Establishing a recycling policy
- Implementing water conservation procedures
- Ensuring all new construction adheres to LEED principles
- Have Custodial Services implement a “Green Seal” purchasing strategy
- Practice green landscaping techniques
- Adopt non fossil fuel powered transport for campus services
- Establish an Environmental Preferred Purchasing program.
There are many ways that carbon emissions can be reduced via simple techniques as above. However, Executive Leadership needs to know how the University is tracking in relation to its objectives. IWMS systems that track and manage these environmental strategies and account for carbon savings are an important tool in delivering these results.
The TCO model incorporates all the costs of operations, and all the financial and societal benefits of implementing an IWMS system. Facilities Maintenance and Operations savings alone contribute over 60% of hard dollar savings.
In our 10,000 student campus example we have used, the cumulative process savings from implementing an IWMS system equate to almost $18 million over 5years. While this may seem a staggering number for a 10,000 student university, it should be remembered that Finance has typically only be exposed to the potential savings from a facilities budget. The costs that the facilities group is responsible for in the total M&O budget is often less than 30% of the true total operating costs. As a result, the savings are limited.
The final proof for Finance is the Return on Investment. In our example, the ROI is 5.3 months. Even allowing for a much higher WACC, the ROI is still under 9 months. This virtually eliminates the argument that the University has more cost effective programs that deliver a better ROI and builds a defensible case for increased facilities funding.
What other low cost investment could save a university $18 million and pay for itself in less than 6 months?
(c) 2009 Anthony R Stack
About the Author
Tony Stack is the Managing Director of BeyondFM. With over 25 years of facility management and real estate strategy and operations experience in the higher education and corporate world, Tony has worked with Facilities Leaders around the world to develop business processes that position facilities groups as change leaders. He has been instrumental in the development of several large scale facilities strategies for Universities and Colleges based on demographic and economic change drivers and brings insight into the way technology and business process can be blended to enable and support change.