For most Admin and Facility managers like yours truly, Financial Management is a dreaded exercise that is taken up annually when the Budgeting is around the corner. We struggle with Capex., benchmark with previous year or comparable sites, look at dubious forecast plans shared by the line and then come up with Opex budgets. This is followed by an exercise of convincing the CFO’s office and eventually we get done with it, hoping not to be bothered by it, for another year. What comes naturally for some seems a nightmare for us. However, some basic application of tools and techniques that the finance guys use are immensely helpful for us too in predicting the ROI (Return on Investment) and thus justifying our budgeting strategies. There is definitely more to financial planning than allocating the dough in our kitty to our unit’s needs
Assumptions:
I recall a very old fable which revolves around a saying which says that to ASSUME is to make an ASS of U and ME. But as with the case of most planning, financial planning too depends on the assumptions we make for our own function as well the assumptions that the organization is making keeping the FY ahead. The financial performance of any facility broadly defines how well the facility is performing as a financial asset. It is upto the site management to decide what should constitute a good performance as there no applicable thumb rules here. Primarily, it should sync with the facility function at large as well the financial assumptions and forecasts that the organization is making for itself. One should be very careful in fixing these assumptions as a slight deviation in this stage could lead to a huge delta on the year end performance.
Let us look at 3 tools which are easy to comprehend and deploy that can be great help in our planning:
1. Lowest First Cost Analysis
The lowest first cost approach is merely finding the lowest-priced item that meets your specifications at the time you need it. This approach works best for a narrow set of circumstances like below:
Identical brands and suppliers are available for our need. (Eg: Tissue Papers, Stationery etc)
Availability and Supply of the said material is not a challenge
Substitution of one brand for another doesn’t impact the user and is not infra dependent ( A4 Paper, Air freshener canister)
The maintenance cost or storage cost is minimal or non-existent
In all of the above cases, the lowest first cost strategy is the best choice. However, it is not sufficient for all planning needs. Any need that has a perception based satisfaction can’t be defined for quality and quantity so easily and this strategy won’t function well the moment there are ambiguities in the need specification. That is where people come up with phrases like, for better quality one needs to pay more, etc.
The advantage of this strategy is that it doesn’t usually impact the budgeted expenses adversely. The rate normally rallies around a standard and anomalies are rare. At the same time, the disadvantage is that Life Cycle Cost or Operating Cost on a long term will increase. For example, using the cheapest available A4 paper will be easy on the Operating expense but might result in buying a new printer altogether before the actual Life time of the printer. Buying a slightly better quality paper will help us use the same printer for long and the best quality paper will enhance the printer for much longer.
2. Life Cycle Cost Analysis
Traditionally, Life cycle cost analysis (LCC) is a construction-based decision method, and not an accounting method. There are three major cost categories in a life cycle cost analysis.
1. Initial cost (Cost of acquisition, design, delivery, installation, testing, renovating, relocating, modifying etc. Eg Design cost for a Kitchen Modification and the project cost in commissioning it)
2. Ongoing expenses or what we usually refer to as Operational cost — such as utility, servicing, and maintenance costs that continue as long as the asset is used ( AMC of the kitchen equipment, B check on DG Set etc)
3. One-time future expenses — such as system calibration after commencing operation, and major upgrades or overhauls — that occur infrequently and predictably during the life of the asset ( Software upgrade that we undertake as and when required, Anti-virus up gradation etc)
LCC Analysis accounts for ALL the costs associated with an asset including cost of removal if any, disposal etc. One additional parameter that comes into play in LCC analysis is the aspect of time. Calculating the depreciation where applicable. This approach is hugely helpful when we have the complete utilization forecast. All one needs to do it have a comparable statement of LCC analysis of all available options and the winner will be looking in our face. Predictably, this approach hence is valid for analyzing investments when long-term payback is a major factor. The shorter the asset life, the less useful this method becomes.
When calculating life cycle costs, few factors ought to be considered are:
• Life expectancy of the asset
• Assessment of all costs and discounts, plus tax impact if any
• Capitalization of the costs that are capitalized
• Fair estimate of the inflation and interest rate during the life expectancy of the asset
Because assumptions may vary widely, the best approach is to predict outcomes based on a range, such as an inflation rate of a minimum of 5 percent and a maximum of 8 percent annually.
A great example of effective utilization of LCC analysis is during the installation of an energy management system or a Rain Water Harvest System etc. The cost of an energy management system is added to standard electrical and mechanical equipment costs. To justify the additional cost, the savings that are produced are also quantified and analyzed. Energy management systems and other such products produce cost avoidance or cost savings after the payback period too.
Life cycle costing is also useful for producing documented information about longer-term savings. Most products require some amount of maintenance to operate effectively over the long term. Therefore, such costs must be considered when making a final product decision.
3. Cost-Benefit Analysis
Cost-benefit analysis asks: "Are the benefits of a project worth its costs?" Cost-benefit analysis should be the method of choice if you must compare quantifiable (measurable) parameters with qualitative factors. It is not difficult to see that decisions made on the basis of quantifiable costs or savings (avoided costs) are easier to make. This method is useful when analyzing projects that involve physical improvements to existing infra structure but do not affect the market or asset value of the property as a whole. It can even be used to support trade-offs between cost related and qualitative factors
Not every quantifiable issue relates to cost. For example, specifications for computer systems include many measurable elements that do not relate directly to cost, such as amount of RAM, megabytes of disk space, and the clock speed of a chip etc.
To conduct a numerical comparison of hard and soft costs, you will need to apply relative-weighted numeric values to qualitative factors and to costs. These numbers can be assigned to derive an overall score that indicates how well a given project or proposal fulfills the department or company’s stated objectives.
When you begin any cost-benefit analysis, consider the following issues:
• Specifically, what is the project intended to accomplish?
• What conditions constrain or affect the project?
• What conditions might exist after the project is completed?
• Which conditions are controllable and which are not?
• What performance requirements or time and cost criteria will be used to evaluate effective project performance?
• What is the minimum acceptable level of performance in each category?
Hard Costs and Soft Costs
Hard costs are those associated directly with actual construction, leasing, maintenance, and upkeep. Hard benefits are savings on revenues generated directly from these activities. Soft costs and benefits are those related to the management of construction, leasing, and maintenance and upkeep, such as overhead, fees, and management time. These distinctions are not accounting or budgetary conventions, but may figure prominently in the thinking of executives who may be reviewing the project. As we plan for facilities projects, we should keep in mind that the argument for some costs is more persuasive than for others.
• Most persuasive are hard costs or benefits that can be measured and attributed directly to a specific activity, account, etc
• Also persuasive are hard costs or benefits that can be measured but are not attributed directly to a specific project or customer and therefore are allocated on a prorated basis (for example, overhead costs)
• Less persuasive are tangible but unmeasurable soft costs or savings (for example, projected savings in staff time that cannot be tracked or verified in a practical way)
• Least persuasive are intangible and unmeasurable soft costs or savings (for example, improved quality of service) because evaluations are often subjective or inconsistent
It is more difficult to compare hard (quantitative) costs/savings to soft (qualitative) costs/savings than to compare hard costs and savings to each other. The less measurable something is and the more one mixes bases for evaluation (cost vs. time vs. quality, for example), the more difficult comparison becomes. Consequently, project justifications often present the strongest possible case in cost numbers first and treat other justifications as secondary arguments.
The evaluation process is often structured into three levels:
1. Quantitative vs. quantitative factors
2. Quantitative vs. qualitative factors
3. Qualitative vs. qualitative factors
Facility managers must understand many important financial concepts in order to communicate effectively with senior management. Along with a thorough understanding of the core business, these financial concepts are vital if facility managers are to speak the language of business and gain the confidence of corporate executives as genuine contributors to corporate profitability and well-being.
The article is collection of thoughts from my colleagues, current and old, experiences shared over various forums over the internet and facility management events and other relevant sources like project material, submitted papers etc. Please refer to BOMI International’s course Fundamentals of Facilities management for more details.
Please feel free to use any part or complete article as deemed fit. These thoughts and collation have no copyright whatsoever.
Sunday, September 4, 2011
Thursday, June 23, 2011
Facilities Management: An Overview on few current practices, challenges and trends
Till a few years earlier, lot of companies with advanced maturity in processes and technical capabilities too used to consider facilities management as a spend centre and not a revenue generator. This traditional approach has seen a shift in paradigm when professionals started managing facilities heralding the effect of bench marking and best practice adoption. With considerable savings on costs as well as enhancement of service levels, this view started to change. An emerging trend is the focus on facilities management to make the work place safe, comfortable and productivity focused.
Facilities and buildings that facility managers operate not only contribute to the commercial activity, trading, back-end support, manufacturing etc but also are responsible for a considerable chunk of energy usage and in effect the carbon emissions as well; Another emerging parameter under microscope these days.
A trained resource is a scarcity across the industry spectrum and more so in Facilities management as the function is still nascent stages in lot of industries. We all are aware of lot of trained junior resources quickly graduating to become a Facility heads for smaller sites, resulting in scenarios with simultaneous advantages and disadvantages. While people will have to grow and with efficient leadership, the quality of the function in itself will improve, a semi-trained resource in leadership roles has its own disadvantages.
Training the facility management team has multiple angles to consider. Let us list down a few of them
1. Energy management, emissions, carbon foot print and sustainability
2. Emerging best practices and leveraging common knowledge
3. Legislations, changing statutory requirements and regulations
4. People practices, technology advancements and innovation
When we look at any Facility Management operation, the following 4 tenets are apparent
1. Existing state of the facility, readiness of operational team
2. Transition to and expectation from facility management team
3. Establishing the probable gaps and possible bridges
4. Sustenance and way forward
Each of the above is valid for any facility and their interdependence makes them an intrinsic part of any feasibility study, scoping exercise as well as aspect-impact study that one has to undertake apart from business needs and commercials for a site mobilization, certification and efficiency enhancement exercise.
1. Existing state of the facility, readiness of operational team: Fortunate are those who get to manage a new facility- for a lot of the stringent requirements are added in the design stage itself. When planning facility management for a heritage building or a facility with issues and concerns due to improper planning, it becomes that much more difficult for the facility manager to plan the staffing, identify the skill level required for technicians and deploy them. The concept of retro fitting the older facilities to improve energy efficiency etc. The facility management team’s day to day activities are largely focused on keeping the facility operational, comfortable, productive and safe.
However, there are multiple challenges that the FM teams face in managing the existing facilities:
Challenge 1- Qualified and trained resources- There are very few training programs available for technicians, operators, supervisors and facility managers. While business management programs are aplenty, focused facility management programs are only offered by institutes like IFMI (International Facility Management Institute). Manpower is recruited at entry level with minimal qualification and bulk of the training or operational guidance is imparted through On The Job Trainings (OJT). While few service providers in the realm have formalized these OJT programs with dedicated resources focusing on training, bulk of the workforce is not exposed to education or training in the area. The limited class room or structured training too focuses on broad areas of the subject, and definitely not comprehensive exposure. This historical way of learning on the job is applicable for some industries and functions, but to completely bank on OJT for facility management will lead to higher numbers of untrained workforce which has its own disadvantages. Another emerging trend is the incidence of few vocational training institutes offering short term courses in Housekeeping, office administration etc, but keeping current strength and immediate requirements in view, the outflow from these institutes constitutes a small part of the industry requirement. Adding to this, lot of newer concepts in facility management energy management, water conservation, efficiency enhancement, green building etc require not just a practical-hands-on exposure but a detailed theoretical comprehension of the concepts and the nuances of sustaining the improvements.
Challenge 2- Independent Design, Execution & Operations- Very few organizations have a singular vertical that encompasses the design, projects execution and day-to-day facility management. With diversity in leadership, thought process and investments of resource and time, the objectives end of being different. Current trend of out-sourcing these activities brings in additional complexity. Translation of plan to design specifications, design to drawing and execution and from there transitioning to operations team brings in multiple elements to be closely monitored. If any of these steps are slightly mismanaged, the facilities management team bears the brunt of the user group as well as the management. The facility will not yield its optimum utility if not properly thought through during all these phases.
Challenge 3- Investment Crunches- With the government providing multiple platforms for organizations to invest, like STPI few years ago and SEZ in of late the pressure on investments on existing facilities is huge. Companies are more comfortable investing and creating facilities in the areas that attract the subsidies rather than invest in older facilities. This is understandable from an investor’s point of view as newer facilities need less to maintain, abide by the stringent laws and are good to show-0ff. At the same time, older facilities need continuous investment to keep up to the newer laws and periodic refurbishing to keep up to the changing demands of the users. This creates a daunting task for the facilities team. A funds cut, if has to happen, is most probably in the maintenance budget of an existing building than a projects budget of a newer place.
2. Transition to and expectation from facility management team:
A typical transition or Hand-over as popularly known in the facility circles starts with a snag list preparation by the proposed facility management team. This is usually against an impending backdrop of business pressure to take over and mobilize the start immediately. Unless there is a detailed explanation of various design and architectural elements to the facilities team, and passing on the specifications and details to the facilities team, the hand-over would be incomplete. The facility management team should thoroughly comprehend the complete aspects of construction, electrical, water, HVAC, landscaping, server rooms, rest rooms, along with design drawings, as-built drawings, OEM warranties, attic stock, vendor contacts and locked-in AMCs for a period of at least years.
If a building is transitioned from the projects team with all of the above elements, it facilities team would function with much more efficiency than other wise.
3. Establishing the probable gaps and possible bridges: The 3 main probable gaps lie in resource, technology and process. While shortage of skilled manpower as earlier discussed is a primary resource constraint, in few cases mere meeting the desired numbers of necessary manpower itself becomes a challenge. There aren’t many established training schools or graduating colleges where people can study and get trained to become a facility employee, with CAFM certification being the lone exception. A definitive bridge here is to create more awareness about the career opportunities that lie in this industry and to invite private sector along with government initiation. In India, we already have a very successful model in Hotel and Catering management institutes run by government as well as private institutes since 2 decades that have effectively been supplying necessary manpower to the hotel industry. This model can be used for facility management as well. The gap in the requirement-available technology is already huge and is widening due to the increasing expectations from the facilities- viz., LEED certification, Green Building certification, conservation, carbon foot print reduction etc. A deeper insight into using the technologies from manufacturing industries with regards to quality and safety, IT and ITES with regards to CMMI etc and Food industry with regards to HACCP etc will definitely help the facility management industry in general. The gap in process strengthening is due to a self defeating policy that facility management teams adopt. In overlooking the processes and adapting short cut methods, the practicing facility managers add their bit in depleting the life, aesthetics and efficiency of the facility. Processes bring in consistency, predictability and safety.
4. Sustenance and way forward: The facility management function will only become stronger and better managed by professionals in future. This of course necessitates lot of combined effort by the service providers, facility managers, property owners and the real estate industry as well.
a. Identifying the areas of improvement and opportunities for training intervention in all aspects of facility management and bringing in professional and education into the function
b. Use the collective experience of the human resources. With collective experience which is immense in value, new entrants can be trained and existing resources can attend refresher sessions
c. Get the government attention into the industry and seek clarity in the legislation (Power conversion, carbon foot print advantages, water neutral exercise, cGMP training etc) and attract subsidies for facility management education
d. Popularizing certification courses from IFMA and other authorized institutions
e. Creating a platform for sharing knowledge, experience and best practice sharing
f. Documentation for archival and process creation
Finale:
The function has immense potential. The practicing managers only need to get networked and share the knowledge, practices and experiences.
My sincere thanks to IFMA, FM Zone, MMG Worldwide, Paddy Menon, Sunil V, KN Rajan for inspiring me to collate common thoughts and put together this article.
The article is collection of thoughts from my colleagues, current and old, experiences shared over various forums over the internet and facility management events and other relevant sources like project material, submitted papers etc.
Please feel free to use any part or complete article as deemed fit. These thoughts and collation have no copyright whatsoever.
Facilities and buildings that facility managers operate not only contribute to the commercial activity, trading, back-end support, manufacturing etc but also are responsible for a considerable chunk of energy usage and in effect the carbon emissions as well; Another emerging parameter under microscope these days.
A trained resource is a scarcity across the industry spectrum and more so in Facilities management as the function is still nascent stages in lot of industries. We all are aware of lot of trained junior resources quickly graduating to become a Facility heads for smaller sites, resulting in scenarios with simultaneous advantages and disadvantages. While people will have to grow and with efficient leadership, the quality of the function in itself will improve, a semi-trained resource in leadership roles has its own disadvantages.
Training the facility management team has multiple angles to consider. Let us list down a few of them
1. Energy management, emissions, carbon foot print and sustainability
2. Emerging best practices and leveraging common knowledge
3. Legislations, changing statutory requirements and regulations
4. People practices, technology advancements and innovation
When we look at any Facility Management operation, the following 4 tenets are apparent
1. Existing state of the facility, readiness of operational team
2. Transition to and expectation from facility management team
3. Establishing the probable gaps and possible bridges
4. Sustenance and way forward
Each of the above is valid for any facility and their interdependence makes them an intrinsic part of any feasibility study, scoping exercise as well as aspect-impact study that one has to undertake apart from business needs and commercials for a site mobilization, certification and efficiency enhancement exercise.
1. Existing state of the facility, readiness of operational team: Fortunate are those who get to manage a new facility- for a lot of the stringent requirements are added in the design stage itself. When planning facility management for a heritage building or a facility with issues and concerns due to improper planning, it becomes that much more difficult for the facility manager to plan the staffing, identify the skill level required for technicians and deploy them. The concept of retro fitting the older facilities to improve energy efficiency etc. The facility management team’s day to day activities are largely focused on keeping the facility operational, comfortable, productive and safe.
However, there are multiple challenges that the FM teams face in managing the existing facilities:
Challenge 1- Qualified and trained resources- There are very few training programs available for technicians, operators, supervisors and facility managers. While business management programs are aplenty, focused facility management programs are only offered by institutes like IFMI (International Facility Management Institute). Manpower is recruited at entry level with minimal qualification and bulk of the training or operational guidance is imparted through On The Job Trainings (OJT). While few service providers in the realm have formalized these OJT programs with dedicated resources focusing on training, bulk of the workforce is not exposed to education or training in the area. The limited class room or structured training too focuses on broad areas of the subject, and definitely not comprehensive exposure. This historical way of learning on the job is applicable for some industries and functions, but to completely bank on OJT for facility management will lead to higher numbers of untrained workforce which has its own disadvantages. Another emerging trend is the incidence of few vocational training institutes offering short term courses in Housekeeping, office administration etc, but keeping current strength and immediate requirements in view, the outflow from these institutes constitutes a small part of the industry requirement. Adding to this, lot of newer concepts in facility management energy management, water conservation, efficiency enhancement, green building etc require not just a practical-hands-on exposure but a detailed theoretical comprehension of the concepts and the nuances of sustaining the improvements.
Challenge 2- Independent Design, Execution & Operations- Very few organizations have a singular vertical that encompasses the design, projects execution and day-to-day facility management. With diversity in leadership, thought process and investments of resource and time, the objectives end of being different. Current trend of out-sourcing these activities brings in additional complexity. Translation of plan to design specifications, design to drawing and execution and from there transitioning to operations team brings in multiple elements to be closely monitored. If any of these steps are slightly mismanaged, the facilities management team bears the brunt of the user group as well as the management. The facility will not yield its optimum utility if not properly thought through during all these phases.
Challenge 3- Investment Crunches- With the government providing multiple platforms for organizations to invest, like STPI few years ago and SEZ in of late the pressure on investments on existing facilities is huge. Companies are more comfortable investing and creating facilities in the areas that attract the subsidies rather than invest in older facilities. This is understandable from an investor’s point of view as newer facilities need less to maintain, abide by the stringent laws and are good to show-0ff. At the same time, older facilities need continuous investment to keep up to the newer laws and periodic refurbishing to keep up to the changing demands of the users. This creates a daunting task for the facilities team. A funds cut, if has to happen, is most probably in the maintenance budget of an existing building than a projects budget of a newer place.
2. Transition to and expectation from facility management team:
A typical transition or Hand-over as popularly known in the facility circles starts with a snag list preparation by the proposed facility management team. This is usually against an impending backdrop of business pressure to take over and mobilize the start immediately. Unless there is a detailed explanation of various design and architectural elements to the facilities team, and passing on the specifications and details to the facilities team, the hand-over would be incomplete. The facility management team should thoroughly comprehend the complete aspects of construction, electrical, water, HVAC, landscaping, server rooms, rest rooms, along with design drawings, as-built drawings, OEM warranties, attic stock, vendor contacts and locked-in AMCs for a period of at least years.
If a building is transitioned from the projects team with all of the above elements, it facilities team would function with much more efficiency than other wise.
3. Establishing the probable gaps and possible bridges: The 3 main probable gaps lie in resource, technology and process. While shortage of skilled manpower as earlier discussed is a primary resource constraint, in few cases mere meeting the desired numbers of necessary manpower itself becomes a challenge. There aren’t many established training schools or graduating colleges where people can study and get trained to become a facility employee, with CAFM certification being the lone exception. A definitive bridge here is to create more awareness about the career opportunities that lie in this industry and to invite private sector along with government initiation. In India, we already have a very successful model in Hotel and Catering management institutes run by government as well as private institutes since 2 decades that have effectively been supplying necessary manpower to the hotel industry. This model can be used for facility management as well. The gap in the requirement-available technology is already huge and is widening due to the increasing expectations from the facilities- viz., LEED certification, Green Building certification, conservation, carbon foot print reduction etc. A deeper insight into using the technologies from manufacturing industries with regards to quality and safety, IT and ITES with regards to CMMI etc and Food industry with regards to HACCP etc will definitely help the facility management industry in general. The gap in process strengthening is due to a self defeating policy that facility management teams adopt. In overlooking the processes and adapting short cut methods, the practicing facility managers add their bit in depleting the life, aesthetics and efficiency of the facility. Processes bring in consistency, predictability and safety.
4. Sustenance and way forward: The facility management function will only become stronger and better managed by professionals in future. This of course necessitates lot of combined effort by the service providers, facility managers, property owners and the real estate industry as well.
a. Identifying the areas of improvement and opportunities for training intervention in all aspects of facility management and bringing in professional and education into the function
b. Use the collective experience of the human resources. With collective experience which is immense in value, new entrants can be trained and existing resources can attend refresher sessions
c. Get the government attention into the industry and seek clarity in the legislation (Power conversion, carbon foot print advantages, water neutral exercise, cGMP training etc) and attract subsidies for facility management education
d. Popularizing certification courses from IFMA and other authorized institutions
e. Creating a platform for sharing knowledge, experience and best practice sharing
f. Documentation for archival and process creation
Finale:
The function has immense potential. The practicing managers only need to get networked and share the knowledge, practices and experiences.
My sincere thanks to IFMA, FM Zone, MMG Worldwide, Paddy Menon, Sunil V, KN Rajan for inspiring me to collate common thoughts and put together this article.
The article is collection of thoughts from my colleagues, current and old, experiences shared over various forums over the internet and facility management events and other relevant sources like project material, submitted papers etc.
Please feel free to use any part or complete article as deemed fit. These thoughts and collation have no copyright whatsoever.
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