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Building Operating Management

How to Get the CFO's Ear

Twelve facility executives explain how to build the business case for facilities

By BOM Editorial Staff Facilities Management   Article Use Policy

It’s easy to get caught up in talk about money, money, money. Money, as the adage goes, makes the world go ’round. But when facilities — and the people who operate them — are involved, just how important is it?

To the facility executive who desperately needs to fix a leaky roof or patch a pock-marked parking lot, money might seem like the solution. And it is — if it’s available and if the only goal is to fix the immediate problem. For the facility executive who wants not only to fix the problem, but wants to eliminate similar annoyances in the future, money is an afterthought.

These facility executives — some whose buildings operate just fine — understand the real value of money and facilities. They have learned a key lesson: It’s not how much money is available, it’s making sure money is available when needed. These facility executives understand the tremendous value they add to organizations by correcting problems. That’s why time is best spent improving how a facility operates and demonstrating why making funds available for a new lighting system or for a finely tuned control system will benefit the entire organization.

For them, money isn’t the object. Rather than viewing the allocation of money to facilities as a goal, those facility executives view money as the result of their efforts to focus on the bottom-line value facilities bring to an organization. Perhaps there’s reason not to replace a leaky roof — a patch might work until funds are allocated for a new building. Or maybe the pock-marked parking lot can remain while the organization evaluates, for example, whether those who use the building should be moved to another location as part of a plan to consolidate offices.

This collection of stories shows some of the ways facility executives have managed to take a step back from their shot at money to view the financial portrait of their facilities. The eye-opening factor in these stories is how facility executives pursued paths that led them to build relationships with their organization’s top managers. Acquiring money for facilities, as the stories point out, was rarely a goal unto itself.

Certainly, this collection contains stories that relay specific details of what facility executives should know how to do, such as how to benchmark. And there are also stories that explain how to understand accounting terms and principles, as they relate to facilities, and how to build budgets. But there is no how-to cookbook approach that can be applied to all facility executives in all organizations. What these stories make clear is the extent to which facility executives gain access to the CFO by focusing on the needs and culture of their organizations.

The dominant theme in these stories is the need for facility executives to get the attention of the CFO. Although every organization doesn’t have a CFO — most notably, government organizations — every organization has somebody who is responsible for finances.

It’s tough to overestimate the importance that position plays in granting a facilities department its just due. The person in that position is charged with making sure an organization’s finances are in order and on track to meet goals.

If you are part of an organization that doesn’t have a position bearing a CFO title, that’s OK. Just replace “CFO” in these stories with the title of the person who parallels the CFO’s function in your organization. As Larry Vanderburgh, senior industry and academic adviser for BOMI Institute, puts it, a career depends on it.

“Most successful facility executives have hitched their wagons to the CFO,” he says.

Read on to learn how leading facility executives have done just that.

How to Get Started
How to Use Data
How to Make a Presentation
How to Justify Facility Investments
How to Sustain Momentum

How to Get Started

Day One: The First Step May Be the Hardest to Take

TIP: Each business has its own key financial measures. Find out what those hot buttons are, then present facility gains in terms of those metrics

Advice about building or maintaining a good working relationship with the CFO rings hollow for some facility executives. In their organizations, the CFO shows no interest in facilities. Productivity? Life- cycle costs? Forget it. The CFO’s entire vocabulary, it seems, is limited to a single word: “No.”

For these facility executives, accounts of meetings where the CFO and other members of the top management team review key facility and real-estate performance indicators aren’t inspiring — they’re frustrating. Their question is simple, “How do I get started?”

Tom LaDue understands the challenges of getting started.

“You’ve got to prove yourself,” says LaDue, director of the workplace business partners group at McKesson Corp. “You’re probably not going to walk in on day one and get the CFO’s ear by saying you have a great business case for why the company should spend more money on preventive maintenance.”

LaDue and other members of the real estate staff at McKesson have had plenty of opportunity to practice the skills involved in building a relationship with a CFO and other members of top management. The company centralized its real estate function about two years ago. Since then the real estate staff has had to demonstrate its value to the business units one at a time.

Even when it came to opportunities to cut costs, the new real estate function had to prove itself to the business units. For example, the real estate staff had many questions about business strategy — information that ordinarily was held close to the vest. “Sharing that information was difficult for some of the financial people,” LaDue says.

But that information was crucial. With it, the real estate staff could offer advice about consolidating space or structuring leases with flexibility.

It took some time, but a persistent effort won over business unit leaders. “The first year was a lot of proving ourselves,” LaDue says. “We had to get some wins under our belt.”

One lesson from that period is the value of linking real estate initiatives to business unit goals. Unlike the inner details of business strategy, the business unit goals were well publicized. “Each business unit is fairly vocal about its goals,” LaDue says. “Now that we’re linked to their goals, we’ve gotten acceptance much more quickly.”

But it wasn’t enough to suggest ways that real estate could help meet a goal. Every business unit has its own key financial measures. But whether it was revenue growth, return on committed capital or some other metric, real estate advice had to be put in the context of a measure that was important to the business units.

“We did a lot of research on what their financial hot buttons were,” LaDue says. “We wanted to make sure we were using metrics they’re used to seeing.”

It took a year of diligent effort, but real estate executives now meet once a quarter with business unit CFOs to review savings initiatives and key numbers like occupancy costs or the mix of leased and owned space. “They never had those metrics,” LaDue says. “And those measures have started some great conversations.”

Identifying the right metrics took time. “We didn’t go in telling them what we were going to present,” LaDue says. “We explained what we thought they might want to know and asked them to tell us what they needed.”

Today, those quarterly meetings offer the opportunity to discuss a range of issues related to facilities, including ones that would otherwise never have gained the CFO’s attention, like preventive maintenance. Topics like that are “less interesting” to the CFO, LaDue admits. “But when you can present a business case to the CFOs, they’re typically very willing to listen.”

Just don’t expect that sort of reception on day one.

Edward Sullivan, editor

The First Day — and Every Day

TIP: Before presenting a proposal, make sure the project’s benefits and returns justify the time and demands on senior executives.

You would think when Kenneth Kimbrough talks about real estate, people would listen. After all, as assistant vice president of real estate at Carnegie-Mellon University, Kimbrough is responsible for a $1.4 billion portfolio. And before he took on that responsibility, he headed up the Public Building Service (PBS), the agency that managed 276 million square feet of space for the federal government during Kimbrough’s tenure. Kimbrough led the way as PBS began to reinvent itself based on the model of private-sector real estate organizations.

But Kimbrough has some advice for facility and real estate executives impressed by his resume and eager to follow in his footsteps: Don’t get full of yourself.

“I have to daily take my ego and put it on the shelf,” he says. That’s not always easy.

“As the senior real estate person, you expect to be called in when real estate decisions are being made,” he says. “But sometimes decisions are made and you find out later.”

For some facility executives, of course, being in the dark about business decisions that will shape facility needs is an all-too-familiar feeling. But even in organizations where the facility or real estate function has a solid relationship with the CFO and other top executives, there can be times when the facility executive finds out only after the fact about decisions that have major facility implications.

In other words, it goes with the territory.

What They Don’t Know

To make the best of these sometimes-sticky situations, facility executives should analyze the decision from a facility perspective and let top managers know about impacts they may have overlooked, especially ones related to costs.

There’s a corollary to that lesson. It involves a concept that has been called ROM — return on management.

Art Elman, the vice president of corporate real estate and facilities at ADP, explains it this way: Senior managers have a limited amount of time to devote to any individual project, so they have to weigh the amount of their time a project will take against the likely return. A project can be worthwhile in many respects, says Elman, but if the return is too small in relation to its demands on top management’s time, it probably won’t win support.

Clearly, when it comes to top management, even facility executives with long track records of accomplishments have to keep a sense of perspective about their place in the organization. One facility executive shrugs it off this way: “The boss is still the boss, whether he knows anything about real estate or not.”

Edward Sullivan, editor

Using Data

Benchmarking Against Other Organizations Can Open CFO’s Eyes

TIP: Use the performance of peers or competitors to provide a context for facility decisions

When he interviewed for the top real estate slot at Carnegie-Mellon University, Kenneth Kimbrough was assured that his $7 million budget gave him the resources he needed to get the job done. But once Kimbrough had accepted the position as assistant vice president of real estate, he soon developed a gut feeling that important work wasn’t getting done.

Kimbrough had a wealth of data about his facilities. He knew how much the university was spending to heat buildings in winter, repair roofs and make sure the chiller plant was keeping up with growth. But even so, Kimbrough found himself struggling to answer a simple question: What did all that data mean?

Kimbrough’s problem was a common one: His own numbers didn’t tell the whole story.

Kimbrough certainly had plenty of numbers. He knew, for example, that each shop employee completed 618 work orders per year. But was 618 completed work orders high or low?

Answers to questions like that were essential to provide the CFO with a context for facility-related financial decisions. So Kimbrough benchmarked the university against its competition — other private research institutions.

It turned out that Carnegie-Mellon was at the head of the class when it came to the number of work orders per employee. But benchmarking also suggested that the university had some catching up to do.

“My metric on facility renewal was low,” Kimbrough says. “That probably meant we were running a little long on major renovations.”

The benchmarking analysis showed that it would take $20 million a year to reach equilibrium on deferred maintenance; at that point, things would be replaced just as they wore out. “Very few institutions have the money to do that,” Kimbrough says. Instead, Kimbrough focused on key physical assets — the campus’ original buildings, for example — and created a targeted level of reinvestment in infrastructure, not counting new buildings. Then he went to the board of trustees to make his case.

The key was having a context that trustees could relate to, Kimbrough recalls. “I asked them, ‘Aren’t we trying to be like MIT and Johns Hopkins? Well, this is what institutions like those are doing. This is the way we’re going to have to invest if we’re going to be competitive.’

“I was able to get them to move me to $10 million,” Kimbrough says. “That’s halfway to $20 million. And it’s a lot better than $7 million.”

Edward Sullivan, editor

‘Dashboard’ Gives CFO Key Data at a Glance

The driver of a car really doesn’t care how the vehicle works. All the driver really needs is a few pieces of basic information: what gear the car is in, how fast it’s going, whether the engine is getting too hot. That’s what the dashboard is for — to give the driver vital information at a glance.

These days, a car isn’t the only place to find a dashboard. Facility and real estate executives are using that concept to give CFOs a quick, up-to-the-minute look at how the portfolio is performing.

The items on the dashboard vary from one organization to the next. “You have to find the metrics that are right for your organization and track those diligently,” says Art Elman, vice president, corporate real estate and facilities, ADP.

A dashboard might show the organization’s cost per square foot of space, or the number of square feet per person, or the vacancy rate. The key is working with the CFO to identify the metrics that matter.

Some good basic measures include the amount of space the organization occupies, the number of employees and the cost of space, Elman says. “You start dividing any of those by any other and you’ve got the making of a dashboard.”

Edward Sullivan, editor

Tracking Past Performance Keeps Facility Executives a Step Ahead

TIP: Poor performance is no reason not to report on how you’re doing. Ask for six months from the start of data gathering to improve

To many top facility executives, benchmarking is more than just a tool for developing a relationship with those that set the budget. It’s also a valuable and necessary means of measuring the facility department’s performance and gauging areas where improvement may be needed.

A key to benchmarking, though, is establishing what can be benchmarked, says Victor Atherton, associate vice president of facility administration at the University of Miami’s main campus in Coral Gables, Fla.

After that, it’s just a matter of getting started. “It’s okay if facility performance stinks at first. It’s all about gauging where you are, and that’s the hardest part about starting to benchmark. Sometimes you don’t want to know where you are, and you really don’t want to go to the boss with it. But if the boss is skeptical, ask him to give you six months, and in that time work hard to establish benchmarks and improve from where you started.”

Atherton oversees 4 million square feet of space and benchmarks everything from cost of energy per square foot to staff productivity and response time. He uses data to illustrate the effectiveness of past projects so that future projects won’t be questioned. “Data causes me to ask tons of questions, but provides answers to even more,” says Atherton. “If I can’t measure it, I can’t manage it.”

For instance, Atherton’s department replaced fan coils in the air conditioners of every unit of a seven-story dorm. After the replacement, air conditioner-related complaints dropped 64 percent. Atherton also uses comment cards that his staff leaves behind at service calls to assess satisfaction with the facility department. He gets about 100 back a month, and 98 percent of them rate the service they received from the facilities department as either “good” or “great.”

That data allows Atherton to defend the department when the occasional faculty member complains about the facility department’s efficiency. Atherton has the numbers compiled to show that the rest of the university is generally satisfied with the service.

When tracking energy consumption, keep the data simple and translate it into financial language, Atherton says. At the University of Miami, a staff member enters the total kilowatt-hours for each building into a spreadsheet, which calculates the dollar amount per square foot of space. This allows Atherton to identify trends and changes in the university’s energy consumption. But just as importantly, it gives him data to illustrate the exact financial details of his work. “Data is the best way to establish a track record,” he says.

“You gain an immense measure of credibility if the CFO asks if you’re benchmarking, and you can say, ‘Yes, and here are our numbers.’ ”

Greg Zimmerman, managing editor

Presenting the Case

Knowing CFO’s Financial Outlook Can Improve Prospect for Facilities

TIP: For any given accounting period, know whether the CFO is trying to control expenses, boost assets or reduce liabilities

It’s not easy asking a CFO for hundreds of thousands of dollars to fund parking lot repairs, roof replacements or chiller retrofits, and some facility executives make it more difficult than it already is.

“I’ve seen a lot of facility people get in trouble when they start talking about the technical aspects of a $2 million roof replacement,” says Thomas McCune, CEO of AE Pragmatics, a facility planning and consulting firm. “Meanwhile, the CFO is sitting there thinking about depreciation, expenses — a real balance-sheet view of the world.”

The challenge to facility executives is to learn to talk intelligently with the CFO about the finances of specific projects. They should know how to present a project’s finances using specific equations and understand the way a CFO views facilities and related expenses from an accounting standpoint.

To do that, you have to know how the CFO thinks.

Some basic equations and concepts that make a CFO’s brain tick include net present value, discount rate and payback analysis. More complex formulas and concepts are equivalent annual cost, return on investment and rate of return.

In addition, facility executives should be familiar with some basic accounting terms and reports, the most important of which are the income statement and balance sheet. The balance sheet is important to facility executives, McCune says, because of where facilities fit in it. Buildings are classified as long-term assets, which are less desirable to CFOs than short-term assets, such as cash. Two other balance sheet components are liabilities — things the company owes — and equity, a measure of stockholder or owner investment.

A company’s income statements are made up of revenues and expenses. Generally, facilities generate the worst kind of expense in the eyes of the CFO, says McCune, who has developed a presentation titled “How to Talk to a CFO.” Rent, interest, depreciation, property taxes and other such items are called indirect expenses, which means they don’t relate to providing the goods or services that eventually generate revenue for an organization.

It’s important to understand balance sheets and income statements because it will help facility executives prioritize projects based on the CFO’s view of the company and economy. For example, a CFO that views the income statement as an important component in projecting a company’s viability will try to reduce expenses and increase revenues. A CFO that’s balance-sheet driven is likely to balk at projects that require outside financing because they drive up debt, a liability.

“I’ve worked at companies that had capital up the wazoo, but you couldn’t get any money for maintenance because the financial strategy of the company was to reduce expenses,” McCune says.

Not understanding how facilities are accounted for financially can land facility executives in sticky situations. John McLaughlin, senior consultant with Stantec Consulting, a facility consulting firm in Edmonton, Canada, says one error facility executives make is not distinguishing whether a project produces savings or reduces expenses.

Consider a facility executive who gets approval to construct a new roof. In making the pitch to the CFO, the facility executive says a new roof will save the company money because it costs so much to maintain the existing one. The project gets the go-ahead.

A year later, when asked how much money the new roof has saved, there’s a good chance the answer is “none.” Money spent on maintenance was only shifted to the cost of purchasing the new roof.

A wise course for facility executives to take, McLaughlin says, is to keep references to savings for projects which have a basis to compare expenses. For example, the energy consumed by a new, efficient HVAC system can be compared to the energy expense of an older system.

“There have been some facility managers that have gotten into hot water by saying, ‘I’m going to save you money,’ and then all they really did was avoid costs or shift them to fund a new project,” he says.

Mike Lobash, executive editor

Standardized Project Proposals Elevate Facilities Department

TIP: Tie each proposed facility project to a strategy outlined in the business plan to help make the case for capital requests

Rusty Hodapp cares that every ‘t’ is crossed and ‘i’ is dotted. He cares so much, in fact, he spearheaded an effort to make sure everyone in his department did it in the same way.

As transition manager for the $2.7 billion capital development project under way at Dallas/Fort Worth International Airport, Hodapp landed his crew in good stead with the airport’s financial managers. He standardized the way the facilities department submits capital project proposals and increased the heft of financial information included with each submittal.

With 17 years experience in facilities at DFW airport, Hodapp has a good sense of what flies — financially — around the airport. What doesn’t fly is the way his department used to present its project and budget requests.

For one, every proposal submitted looked different. On top of that, he says, the proposals were “one-page deals.” They contained a mere paragraph describing the project and a cost estimate that was usually so far from reality that, over time, the department’s requests lost credibility with the airport’s financial people.

“We were at the bottom of the totem pole,” Hodapp says. “Our capital investment requests were terrible.”

One of the ways Hodapp set out to raise the standing of the facilities department was to call in a technical business writer. During a day-and-a-half-long session, the consultant critiqued the department’s budget requests and offered suggestions on how to change them.

What resulted from that session was a standard that all requests from the facilities department would follow. All submittals would use the same font. They would all have the same writing style. Most importantly, they would all contain financial analyses capable of standing up to the rigors of those reviewing the requests.

There isn’t a capital budget request that goes for approval now, Hodapp says, that doesn’t contain an analysis of the net-present value of a project as well as a least-cost alternative. Proposals also contain a “do-nothing” alternative.

Standardizing project and budget requests was such a hit that the airport’s financial department took the facilities approach and made it standard operating procedure for all DFW departments a year after the facilities department started doing it.

Even more important to getting facilities projects approved and constructed, Hodapp says, was the reaction from financial people who saw the importance of facilities to the airport.

“We established a mutual admiration with the financial people,” Hodapp says. “All of a sudden we had advocates within the organization.”

What drove the change within DFW’s facilities department, Hodapp says, was a fundamental switch in how the airport approached its operations and the realization that the facilities group somehow missed that switch. The pool of money that airlines used to pay airports for projects started to dry up in the early 1990s. That, combined with the vision of a new airport director, who was determined to operate the airport more like a business and less like the government-funded operation that it is, put facilities out of sync with the airport’s direction.

“We approached what we needed to do in facilities as being self-evident,” Hodapp says. “Well, it’s really not self-evident to the financial or the marketing guys.”

One year after the facilities department standardized its proposals, it cemented its cordial relationship with the financial department. Hodapp started a practice that ties each facility project to strategies outlined in a business plan the airport director rolled out.

Doing that makes the business case for each capital request by tying it to a specific objective. He tells his crew not to spin a yarn when making requests, but to realize that financial managers understand facilities are important.

“When you’re talking about an operation as asset-intensive as an airport, facilities are a big part of the deal,” he says.

Mike Lobash, executive editor

Internal, External Networking Helps Answer CFO’s Questions

TIP: In a meeting with top executives, bring several options to the table. It’s harder to sell ideas without having alternatives

You think you have it tough. Imagine going to the CFO and asking for money to build a corporate facility to meet Nuclear Regulatory Commission design criteria. A structure with 8-foot-thick walls. One designed to continue to operate even if a tornado hit head-on.

In other words, a high-reliability data center.

Welcome to the world of Christopher A. Wade, manager, facilities/critical power in the WalMart information systems division. It’s a world where the level of redundancy must be balanced against the availability of a mirrored site. A place where 100-year flood plains matter. Where more uptime sounds better to everyone — until they hear the price tag.

And where the reliability of the corporate network may depend to a considerable degree on the quality of the facility executive’s network of flesh and blood contacts.

That’s because, when it comes to preparing a presentation for the CFO, the place to start isn’t always with numbers. It’s often with people. And that point is as valid for a small lighting retrofit as it is for the construction of a five 9s data center.

That’s not to say numbers don’t matter. But consider one question the CFO is sure to ask about a proposed facility: Why isn’t the old one good enough any more?

“You have to be able to tell the financial people what the problem is,” Wade says. “And it has to be a problem to them. They want to know what the consequences to the business will be if action isn’t taken. How much money will we lose?”

That’s not a question the facility executive can answer single-handedly. “Our role in facilities is to provide the facility infrastructure design/build costs,” he says. To figure out how much downtime will cost the organization, the facility executive has to tap — or build — an internal network of operating departments.

“I talk to them about scenarios,” he says. “If we lose this equipment, what’s the impact on the business?”

In those conversations, it’s not enough to say that a facility failure will mean the loss of telecommunications capability in a particular area. Instead, the consequences must be put in terms of orders that can’t be shipped or credit card transactions that can’t be processed. “You have to keep talking until you come to some money,” Wade says.

Finding the money is only one example of the networking Wade does before he walks into the CFO’s office. He goes to the users of space, for example, to understand their needs. And he assembles a committee of key players from functions like structured cabling, network engineering and telecommunications to identify alternatives, costs, benefits and potential problems.

Even as he gathers information from within the company, Wade is calling on another network — facility executives responsible for similar data centers, along with architects and engineers who design data centers — to help determine the life cycle of various data center options.

There’s also a wealth of material from the biggest network of all: the Web. “I’m on the Internet all the time,” he says. And he turns to yet another sort of network — the one that holds the database for facility maintenance and operating costs — to evaluate and justify recommendations for building materials and systems.

Those benchmarks, whether drawn from internal records or from outside sources, are invaluable. “It’s some of the best information you can have,” he says.

Armed with documentation gleaned from an array of sources, Wade is ready to make a proposal — or rather, his proposals.

“You have to give them options,” he says. “If they don’t have any alternatives, an idea is hard to sell.” He likes to go into a meeting with three choices — plus the option of doing nothing. That’s when the questions begin. What’s the business advantage of one level of reliability over another? Why select a new generation of building automation over an old one? At that point, it’s crucial to have, not only answers, but sources — “something to back you up,” as Wade says.

“I’ve been involved with data centers for about 25 years, but it’s really a new field,” he says. “I remember when we had 8-inch raised floors. Now we have 3-foot raised floors. The data centers of today are totally different. It’s a lot to know. That’s why networking is so important.”

Edward Sullivan, editor

Turn to Pros to Help Polish Presentation

Salesmanship is a skill that traditionally hasn’t been part of the job description of those who manage facilities. But the ability to communicate the results of a project, or to describe the benefits of a proposed one, is increasingly crucial to facility executives.

At McKesson Corp., the real estate function turned to the company’s corporate communication department to help win support for a major initiative on space standards, says Tom LaDue, director of the workplace business partners group for McKesson Corp.’s real estate function. “They helped craft a lot of the communication.”

The McKesson real estate department also worked with its outsourcing partner to provide training to the department’s staff on areas like presentation skills. “We have to be able to sell ourselves, not in a blatant way, but to show what we’ve accomplished,” says LaDue. “It’s not something that a lot of real estate people do naturally.”

That training is paying off when it comes to making a business case to top management, LaDue says. “Our team is getting much stronger.”

Edward Sullivan, editor

Into the Lion’s Den

For facility executives who think that CFOs and their staffs are only interested in finding excuses to shoot down proposals, it may come as a surprise to learn that the accounting department can be a valuable resource in the process of preparing a presentation for the CFO.

Robert Cline, director of general services administration for the National Geographic Society, has a business background and is comfortable with numbers. But he knows the information has to be as concise and accurate as he can get for the CFO. So to help prepare for a meeting, he works with both his own facility team and the accountants for each department. By doing so, Cline is able to assemble project and operating budgets with reliable projected cost figures.

“There’s a good support structure at the Society that we try to tap into when it comes to putting a proposal together,” Cline says. “There’s a controller, a staff corporate accountant and a budget director offering assistance when we need it.”

When WalMart’s Christopher Wade needed to demonstrate that building a new data center was justified by the high cost of downtime of the old data center, he turned to the finance department for help. He had never gone through the process of adding up all the costs of downtime and wasn’t sure exactly how to do it.

“I called the finance department and asked them how to do a breakdown analysis on the loss of a data center,” he says. The financial staff was more than willing to help and provided Wade with the information he needed, including a list of all the departments that would be affected by the loss of a data center.

“One of the things I hadn’t thought of was productivity loss,” Wade says. “If data centers go down, no one can work.”

Maintaining regular communication with financial professionals is critical throughout the year, but it’s important not to overdo it. Cline says that he seeks assistance only when he needs it and is careful not to overuse or abuse the support these departments offer.

“While facilities is on our minds, we know there are other objectives of the organization,” he says. “We have equal footing with other departments, but no more and no less.”

Edward Sullivan and David Kozlowski

Justifying Investments

Showing Investment Potential of Facilities Crucial to Capital Planning

TIP: Start by calculating a target level of funding for infrastructure renewal to show the CFO the need for annual investment in facilities

Nobody ever said that finding reasons why an organization should build a new campus, invest in energy efficiency upgrades or focus on life-cycle costs would be easy. Consider the facility executive who went through the painstaking process of developing a facilities renewal program — complete with strategies for identifying projects, estimating costs and establishing schedules — that was thorough enough to earn a spot on a conference agenda. Only one problem: Top management shot the plan down because there just wasn’t money in the budget.

Alan Neuner was in the audience during the session where the facility executive described his plan. Neuner, associate vice president of facility operations for Geisinger Health System, liked what he heard — all except the end of the story. After hearing the presentation, Neuner vowed not to let fiscal misfortune sidetrack his facility plans. He not only developed a capital improvement program, he also took care to justify that plan to top management so that the time and energy spent working through the renewal plans would be rewarded with adequate funding.

Neuner’s first step was to identify a target level of funding. Overestimating a target is as worthless as having no target, says Neuner, so he calculated an amount and then cut it in half. The goal of establishing the target level of funding was not necessarily to achieve that exact dollar amount every year, but, more importantly, to force the CFO to understand the necessity of budgeting some money for facilities renewal. In the nine years of Neuner’s program, he’s received $20 million of funding. Of that, $8 million has been spent on improvements intended to reduce energy costs, a strategy consistent with the goals of the organization.

The next step was to outline how the money would be spent during the infrastructure renewal period. To show that, Neuner categorized infrastructure elements, such as roofing, parking lots and building shell, but left room in the plan to meet shifting facility priorities and conditions.

“The plan should be adopted long range, but updated annually,” he says.

When Neuner went to present the plan to the CFO, he prepared several talking points to drive home the need for the infrastructure renewal plan. He likened infrastructure renewal to home ownership, discussing annual depreciation expense, explaining that the building and system assets are about 75 percent of the organization’s total assets, and discussing the effect building appearance and performance have on other matters, such as customer satisfaction.

Furthermore, he discussed how infrastructure improvements would reduce operating costs — cutting energy use, for example.

“The argument can be made more convincing if there is a monetary return from an investment,” he says. Because savings in energy and other operational costs go directly to profit, Neuner takes the anticipated savings and divides it by the desired corporate profit margin. The quotient shows how much new revenue would be needed to equal the profit impact of operational savings.

Another tactic Neuner uses is aimed at getting the CFO to view infrastructure renewal as an investment. The case can be made, he says, that energy savings offer a higher return with less risk than stock market investments.

Projects under Geisinger’s infrastructure renewal plan have netted an energy savings of $2.2 million annually. Energy costs are the same now as they were 10 years ago, even though the campus has grown more than 800,000 square feet to 2 million square feet.

A key reason those projects were approved is because Neuner and his staff took the time to show the CFO and others how facility investments could benefit the organization.

“I try to encourage people to get the concept of an infrastructure plan established within their organization first,” says Neuner. “They can avoid the unnecessary work of planning something that may not happen.”

Greg Zimmerman, managing editor

Trade-offs Essential to Getting What’s Needed in New Construction Projects

TIP: In addition to showing how improvements might reduce expenses, show how they’ll help occupants make more money

Working for a multibillion dollar global technology, consulting and outsourcing firm taught Cees de Kuijer a thing or two about justifying investments for new construction projects.

The problem is that when it comes to technology issues, everybody else in the company has learned the same things.

“Trying to build an IT infrastructure in an IT company is a hell of a job,” says de Kuijer, infrastructure manager.

So when it came time for de Kuijer to oversee the IT infrastructure going into Capgemini’s 180,000-square-foot regional European headquarters in the Netherlands, he had his work cut out for him.

De Kuijer wanted to purchase new infrastructure for the data center, rather than moving the existing equipment, and install a cable and fiber system that would be flexible enough to accommodate moves, adds and changes, as well as the addition of technology devices to the network.

To get the money to pay for the systems, de Kuijer showed the connections between the technology and Capgemini’s ability to earn revenue.

The foundation of business for de Kuijer and his colleagues in Capgemini’s infrastructure management department is the company’s data center and the 500 servers contained within it. Similarly, the technology that allows the 1,900 employees at the facility to communicate is the cable and fiber running through the building. For that, de Kuijer got raised floors put in every office and three Ethernet ports at every workstation. The Ethernet connections can be moved in a three-foot radius to accommodate space reconfigurations.

Making an argument that showed how the technology would improve operations, and subsequently finances, helped him avoid one of the largest obstacles that would block approval of new equipment in the data center.

“There is never an ideal financial moment to get rid of old server racks,” he says.

Part of the reason for that is because server racks last so long. So to justify the purchase of new racks, de Kuijer showed why the old racks wouldn’t meet the operational needs of the data center.

The old rack system wasn’t sized properly to house all the additional equipment that might be put in place. Additionally, the new racks allow the staff to address power feed and power distribution issues more easily than it could with the old racks. That reduces the risk of downtime.

De Kuijer used the same approach for the cable and fiber installed in the building. Category 6 cabling should not only meet Capgemini’s needs for 10 years — compared to the five years that Category 5 cable might last — but it also can improve operations. The robust cable can move data 10 times faster, de Kuijer says, improving operations within the facility.

Installing three Ethernet ports at every workspace instead of two gives the facility flexibility to accommodate growth. Going into the project, de Kuijer knew only two of three ports would be active. One port would be used for data and the other to enable Internet telephony, also known as voice-over-IP.

The one drawback to the cabling and Ethernet design, or at least how Capgemini decided to help pay for it, was the need to reduce the number of telephones. Only one telephone was installed for every two employees. The result, de Kuijer says, is that employees who can’t get immediate access to a telephone use their company-issued cellular phones instead.

As a result, de Kuijer says, cell phone expenses have skyrocketed, causing Capgemini’s top managers and board of directors to have “systematic emotional discussions about the use of cell phones.”

“It just shows you,” he says, “that you can’t always have a total solution for your telephony problem.”

Mike Lobash, executive editor

Credibility Is Critical to Making the Case for Quality

TIP: Don’t pad a budget out of fear it might get cut. Being your own toughest critic on budget items will build credibility

John Harrod knew what he was up against. One of the hardest arguments for facility executives to make is the case for better quality. Whether it’s a more durable roof membrane, a more robust control system or better carpet, demonstrating to the CFO that better quality is worth paying for can be a tough sell.

That’s all the more true when the budget for the project has already been approved and the facility executive is seeking a significant budget variance to cover a change order.

But a change order based on better quality was exactly what Harrod, as director of physical plant in the department of facility planning and management at the University of Wisconsin—Madison, had to justify.

The university had just inked a contract with its utility to build a cogeneration plant on campus. The plant would produce 150 megawatts of electricity and 20,000 tons of cooling. Under the partnership arrangement, the university would own the cooling side of the plant.

The utility had designed the project, with minimal university involvement, while the agreement was being negotiated. As Harrod and his team scrutinized the design documents, they came across a serious quality concern: The piping wasn’t stainless steel.

Getting that changed would be no small matter. The hit to the budget would be significant. And it would have to run a gauntlet of reviews that led all the way to the governor’s office.

But Harrod felt strongly about the need to make the change. “Over the long term, stainless steel piping would reduce our maintenance costs,” he says. It would also improve reliability — a critical matter, given that a failure in the piping would effectively shut down the plant.

A flashy sales job wasn’t in order. Instead, Harrod relied on the groundwork he laid long before talk of the proposed plant had even begun.

Consider the way Harrod arrived at a definition of quality. It was based not on Harrod’s ideas about what makes a good building, but on a consensus about how the facility will be used and how long it’s expected to last. “Those decisions aren’t made in a vacuum,” Harrod says.

One group that Harrod made a point of involving was finance. “It’s important to get the finance people to the table very early to give them a sense of the complexity and scope of the project.”

Harrod brought his own numbers to those meetings: records of costs for different types of spaces. That database of facility construction and operating costs put Harrod in a position to speak authoritatively about life-cycle cost issues.

In the end, the change to allow stainless steel pipes was approved. “We were able to show that it was a better value for us over time,” Harrod says. “It will pay for itself many times over.”

When it comes to the budget, Harrod really doesn’t have a salesperson’s mindset. It’s just the opposite: Harrod is his own toughest critic when it comes to proposed budget items.

“One of the challenges is learning what items to carry forward for approval,” he says. “They have to pass your own judgment. Discretion is required. If you do that internally, you develop credibility within the administration. When there’s a legitimate need that can be shown, you don’t face as many challenges.”

Harrod says he believes padding the budget is a mistake. “I’ve heard of individuals who will design opulence into a project, knowing that it will be cut out. In my mind that just ruins their credibility. We work very hard not to do that.

“We don’t put things before the governor very often.”

Edward Sullivan, editor

Sustaining Momentum

The Ultimate Test: A Realistic Budget, Year After Year

TIP: If you’re off target on the budget, don’t cover it up. Own up to the problem and explain how you plan to solve it

Building credibility in the eyes of the CFO doesn’t come with a title or a flashy presentation. It comes with hard work developing a realistic budget, taking ownership of everything that budget stands for and sticking by it.

Craig Sheehy knows the value of double- and triple-checking budgets, project proposals and other documents destined for the CFO.

Sheehy, director of property management for Thomas Properties, manages the 1.4 million-square-foot Joe Serena building, home of the California Environmental Protection Agency headquarters. His “boss,” CalEPA’s CFO, wants a cost analysis that includes a return on investment and payback on any project.

To provide it, Sheehy relies on staff experts — operations managers and accountants — and trusted vendors to make sure the data is as accurate as possible. He will also go to a third-party mechanical, electrical and plumbing contractor for verification and comparison. However, even after all these experts have gone over the numbers, he will do his own review. Why?

“In one case, we were doing a major energy project, and I knew the numbers weren’t going to look really good in terms of payback,” he says. When he got the proposals, he was shocked to find how good the payback was projected to be. Then he looked closely at the numbers.

“The proposal included an electric rate of 11 cents per kilowatt-hour; we pay 9 cents,” he says. Correcting that error pushed the project’s payback beyond the 5-year threshold the state normally uses as a limit on project approvals.

Sheehy recommended against the project.

The state, however, approved the project. It wasn’t because Sheehy miscalculated numbers.

“The state will sometimes extend that payback for environmental reasons, so they went with it.”

Like Sheehy, Gary Saulson recognizes that guesswork, especially guesses on the high side of the budget, is a fool’s game when it comes to working with senior management.

Saulson, director of corporate real estate for PNC Financial Group, says what his CFO is looking for — and what he tries to deliver — is “an honest budget.”

“Put together a true budget; don’t pad it,” Saulson says. “That is what builds credibility. Don’t pad it and then say, ‘Look, I came in under budget.’ The CFO will see through that.”

Developing that credible budget for Saulson also means getting the best numbers possible and not using inflated numbers in place of ignorance. This means also relying on “friends” — internal and external experts — especially when it comes to capital project budgets. Saulson has his own team of experts write a project budget and simultaneously has an outside construction company write up a project budget — a company Saulson has come to trust over the years. “Then we compare the two budgets,” he says. “The external budget usually gives us a better handle on material and labor costs.”

To keep control of the well-honed $300 million operating budget for PNC, Saulson reviews each department’s budget monthly and looks for exceptions, such as spending too much or too little on snow removal. The budget is value-engineered throughout the year to control costs.

If a problem does come up during the year, deal with it right away. That is what the CFO expects, he says.

“I don’t think you should have to cover your rear,” he says. “If you have an issue, you should raise your hand and admit you have a problem. Own up to it, and say this is how I am going to fix it.

“Credibility is the most important thing,” Saulson says. “This is built up over time by presenting realistic budgets, year after year.”

David Kozlowski, senior editor

posted on 9/1/2004