The financial case explained for Real Madrid’s investment in Gareth Bale was predicated primarily on the hard benefits that might be ascribed to his presence on and off the field.
Most of these benefits cannot be attributed directly to Bale’s talents, but the indirect associations are not difficult to make or for many fans to go along with.
Away from the ultra-wealthy world of football, however, it is probably fair to say that although organisations with cash surpluses are generous with their facilities provision — often to a fault, wasting good money on unnecessary levels of quality — 90 per cent of organisations do not come into this category.
There is usually too little money chasing too many cost centres and it is in the latter circumstances that the issue of ‘affordability’ comes under the microscope. Here, we look at how to use risk avoidance as a case for the affordability of investing in facilities performance.
But what is ‘affordability’?
Affordability
The ability to afford to buy something relates to having access to funds rather than the willingness to invest.
There are circumstances where people or organisations literally cannot put their hands on more money, however much they might need it; in a business context an organisation can only afford the facilities it has the money to pay for. However, if the money isn’t there because it has gone on something else, the question is: did anyone make a formal business case for the distribution of expenditure in that organisation? Too often one suspects facilities budgets are based on a residual calculation — ie, what is left over after everyone else has dipped into the funds available.
What should really happen is that funding for every cost centre is tested against the organisation’s “criterion rate of return” — the minimum return they must be sure of making if the investment is to be sanctioned. In practice the investment rate often varies depending on the purpose of investment and the risks attached; in times of cash flow difficulties firms will often seek a far greater return on projects or services involving capital upfront than they will seek where payment can be deferred or provided by others (for example, new build owner-occupation as opposed to rental).
Any proposal which does not achieve the criterion ROI is not affordable, regardless of the actual availability of funds: those surplus funds will be reserved for offerings which do meet the required ROI.
Your job is to demonstrate that the provision of the right level of facilities are affordable (so long as the ROI has been set at a level which controls expenditure of available funds).
Calculating the ROI
The stark reality is that it’s never going to be easy to wean money away from core business requirements on the basis that it would be used more beneficially on facilities. It is surprising how often core business inadvertently indulges itself in redundant performance (capability which adds nothing to the process, but at a cost).
There are undoubtedly times when the business would be better advised to increase the performance of its facilities at the expense of direct investment in core business performance — such as where the core business would be more efficient thanks to better facilities than it would with, say, higher quality supervision. It behoves a well-managed business to test all applications for business funding against the criterion ROI, regardless of whether the cost centres are core or non-core.
The issue again is one of directly and indirectly attributable benefits — and facilities are always going to fall into the latter category. This is why using risk evaluation to justify investment in facilities is well worth considering.
Risk evaluation
The areas of risk exposure are exactly the same as those addressed by quality management and were given in detail in the first article in this series. To recap:
- Image — internally and externally
- Physical property
- Intellectual property
- Persons
- Ergonomics
- Statutory obligations
- Contract obligations
- Asset protection
It is a fact that facilities contain risks to core business that are “soft” rather than “hard”. If the air conditioning is at the wrong temperature or contaminated, people may become inefficient, or absent through sickness — all of which will cost the employer money, but not in a way that is immediately obvious.
When preparing a business case based on risk avoidance, the facilities manager should look at the concept of “zero-base” provision to reinforce the argument. Zero-base can be anywhere you want to strike it, but it should be at a point below which everyone agrees the risks run would be unacceptable, even without doing any calculations to prove it. For example, setting the maintenance at “corrective-only” — waiting until it breaks down before touching it — would probably be a no-no in most modern organisations. But by setting it there and discussing it as a strategy, you bring out all the risks an organisation will face through having an inefficient, under-maintained system.
You need to have to hand the extra costs of the higher facilities provision and an estimate of the potential losses avoided — which will of course start to diminish as the quality of service kicks in. The potential losses and their probability can be assessed in workshop with relevant decision makers; any hard facts in support will be welcome, but these are unlikely to be available. HR could possibly shed some light, but in the end anecdotal evidence may have to suffice.
The return on the higher investment will need to be adequate, even at the lowest common denominator in terms of predicted levels of loss. Sensitivity testing will produce the ROI of the lowest common denominator in terms of probable losses and their cost. If the ROI is adequate at the lowest level of probability (it usually is owing to the relative small costs of facilities compared to the cost of people), there is no need to get into probability analysis; the latter is apt to cloud and devalue the issue and consume busy peoples’ time.
The table (above) is intended as a simple example of the sort of calculation needed. You should note how the extra cost has to be recovered in the year before any return can be shown on the extra investment.
In this example just one employee or visitor scalded by hot water would justify the level of risk avoidance predicted and the containment strategy recommended.
Conclusions
In a perfect world business managers would treat facilities as just another core business cost centre. But we don’t live in a perfect world and, until we do, FMs have to fight their corners as best they can.
The risk avoidance approach is a powerful one: applying the results to ROI is quite easy and it’s surprising how often the results demonstrate an overwhelming case for the improvements to be ‘afforded’.
A facilities policy built around such business cases and signed off by the board really ought to be the aim of every FM worth his or her salt.
-See more at: http://www.fm-world.co.uk/features/feature-articles/problems-you-cant-afford/#sthash.1hMGoc91.dpuf
