by Ed Zielinski, SLCR, AIA — As a former vice president of Global Real Estate & Facilities (RE&F), I managed global portfolios ranging from one million square feet to nine million square feet. My team and I faced specific challenges that may sound familiar to most corporate real estate (CRE) leaders— challenges like how to reduce operating expenses in order to drive corporate profitability. Or, dealing with one- to three-year capital plans that were adjusted every quarter and budgets that changed rapidly based on a company’s financial performance. Some of the portfolios I managed had a large geographic footprint with variable leased/owned ratios, and I had to regularly compete with the company’s business units for capital funds.
To plan capital expenditures during my CRE career, I typically rolled up data generated from each site by individual facility managers. That data was inherently subjective, inconsistent from site to site, prioritized by “want” rather than “need,” and arbitrarily submitted. And, I had limited means to verify the submitted data, validate the prioritization and value-engineer the line item budgets. The best I could do was to use historical spending trends and limited site visits to validate the accuracy and prioritization of the site-generated data. This was especially difficult to manage given sizable portfolios and large, complex sites with potentially thousands of line item capital requests. Inevitably, I had to use my best judgment — negotiating, cajoling and resorting to any means available to reduce budgets when overall capital expenditures were cut across the company.
The gaps I had to manage included the fact that education, competency and skill levels of site facility managers varied, causing inconsistencies that were hard to detect. Politics skewed prioritization on some projects, causing facilities management capital expenditures (FM CapEx) to be diverted for non-FM improvements. Time consuming site visits were necessary for large or complex plants to confirm budgets and validate proposed spend accurately. Not only was it difficult to compare CapEx requests across a large portfolio with thousands of limited description line items in the plan, but I lacked effective analytical tools to model the financial and business impact of CapEx changes—e.g., how to re-prioritize if asked to make a 10 percent budget reduction.
Now that I’m removed from the day-to-day grind, I have gained perspective and become more aware of best practices that would have changed how I approached the challenges I faced as global real estate and facilities executive. For starters, I would have developed a living facilities capital plan.
Elements of a Living Facilities Capital Plan
What is a living facilities capital plan? It’s a plan that enables you to react and adapt to changing circumstances; it aligns your real estate decisions with the company’s goals; it’s based on real and current data; and perhaps best of all, its foundation is an effective process that is repeatable and measurable. A living facilities capital plan has the following elements:
- Strategic alignment between business and facilities/real estate
- Driven by knowledge/support of business unit strategy
- In concert with finance (tax, treasury, FP&A), IT, HR functions
- Governed and adjusted by financial performance
- Data-driven
- Analysis-driven by enterprise-class tools
- Real estate & facilities metrics benchmarked with peer groups
- Effective process
- Business case structure; driven by ROI or alternate rationalization
- Identify and engage key stakeholders, partners and resources
- Repeatable, measureable, reportable
In the paragraphs that follow, I’ll briefly explain why each of these elements contributes to the success of a living facilities capital plan.
Alignment Between Real Estate and Business Strategy
Perhaps the most important goal of a living capital facilities plan is to establish alignment between the real estate strategy and the organization’s business strategy. This alignment is driven by knowledge of business unit(s) strategy and support of that strategy through real estate decisions. Additionally, it’s important that the plan is driven by and can be adjusted to the company’s financial performance. In order to achieve alignment with an organization’s business strategy, one must also correlate capital expenditures with business needs. By doing this, a CRE professional can become an accountable and trusted business partner.
Data-driven
The second element necessary for a successful living facilities capital plan is that it be data-driven. There are two aspects to this: (1) current, high-quality, targeted data, and (2) easy-to-use, enterprise-class analytical tools to turn that data into actionable information and recommendations.
On the data side, facility condition data is necessary and can be supplemented by other data, such as energy usage, functional adequacy and maintenance records.
But even the best data is of little value without the ability to conduct rapid, proactive analysis via enterprise-class tools. One significant metric is the Facility Condition Index (FCI). To calculate the FCI for a building, divide the total estimated cost to complete deferred maintenance projects for the building by its estimated replacement value. Simply put, the lower the FCI, the lower the need for remedial or renewal funding relative to the asset’s value. For example, an FCI of 0.1 signifies a 10 percent deficiency, which generally indicates that a building is in good condition, while an FCI of 0.7 signifies a 70 percent deficiency, meaning a building needs extensive repairs or replacement.
Metrics such as the FCI allow CREs to compare similar buildings to each other, as well as to establish target condition ratings for various asset classes. Certain types of buildings, such as data centers or manufacturing, may be crucial to the company’s mission and should drive investment to improve the FCI. The FCI can be used to prioritize projects, combining condition with other factors such as code compliance, criticality to the business mission and sustainability, with the result being a ranked list of priorities. Finally, the FCI can be used to model “what if” scenarios that demonstrate the effect of capital expenditures on facility condition.
Effective Business Processes
The third best practice in developing a living facilities capital plan is implementing effective business processes. The first step to achieving this involves building a trackable, operational budget based on trailing spend and predictable future spend. Using historical data and leveraging data to predict future spend can help create a compelling business case that demonstrates the rolling, long-term plan with credibility. Map long-term portfolio capital expenditure requirements through the useful life of all assets based on a static scenario, and then incorporate divestitures, harvesting and consolidations into the model as required. Again, it is vital to link the plan to the company’s business strategy—and demonstrate that link in the analysis. Utilize high-quality data and tools to justify the planned capital expenditures in support of business goals.
As part of the business processes, focus on identifying and engaging the key stakeholders in the company. Building strong relationships with Procurement, Finance, Tax, IT and HR can help CREs drive predictable budgeting for operational expenses and capital expenses, which enables them to establish credibility and get the attention of the C-suite.
Using CapEx to Reduce OpEx
A company’s real estate offers the opportunity to reduce and manage operating expenses (OpEx), and working with a living capital plan is an enabler. Many companies are leveraging capital expenses to drive operating expense reductions, creating savings through more efficient equipment or higher capacity utilization. For example, CREs might recommend replacing chillers or boilers with more efficient models to reduce energy spend, or replacing traditional roofs with new roofing alternatives (super insulated, reflective, green or living) to reduce maintenance and utility costs. Once cost savings are realized, CREs can work with partners in the Finance department to verify the savings and help to communicate those savings to the C-suite.
Lessons Learned
During my CRE career, I dealt with constantly changing budgets; the pressure to reduce operating expenses; competition for capital funds; a large geographic footprint; and a culture of reactive capital planning. I know now that following the best-practice approach of a living facilities capital plan can help effectively and programmatically address these pressures in today’s constantly changing and inherently uncertain work environment. With data and tools to develop accurate multi-year plans, identify opportunities to reduce OpEx and align corporate real estate plans with the business strategy, CRE leaders can gain significant value and credibility as effective business partners.
Ed Zielinski, SLCR, AIA, is a retired
corporate real estate (CRE) executive. He is a
former vice president of Global Real Estate &
Facilities for Nuance Communications and
Boston Scientific, and a former vice president
of Asset Management at PerkinElmer. He
can be reached at zielinskiaia@msn.com.