Math Will Rock Your World

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Mathematical modeling of business functions is in! If your facilities or corporate real estate group doesn't have a dynamic financial model that can show the factual bottom-line facility management cost impacts of institutional capital plans, changes in capital plans, major capital investment initiatives, consolidations, moves, relocations, or acquisitions in a matter of hours (instead of painstaking, data-gathering, number-crunching days or weeks), you are so …. '90s, and you are definitely not in the main stream of where U.S. business is going.

To put some traction under this assertion, look up Business Week's January 23, 2006, story on "Why math will rock your world." There you'll see that business complexity, speed, and competition are pushing mathematical modeling (numbers, vectors, and algorithms) into the brain-center of almost all business sectors.

• Finance departments are using sophisticated mathematical modeling to quickly forecast the bottom-line tax consequences of proposed decisions about corporate investments, business locations, and international ventures.

• Marketing departments are using sophisticated mathematical models to analyze prodigious amounts of complex marketing data and map out marketing strategies and campaigns.

• Product merchandisers are using sophisticated mathematical models to profile customers on a nearly real-time basis to arrange store layouts and product displays to maximize profit.

• Financial lending institutions are using sophisticated mathematical models to pick profitable borrowers and discover new "good-borrower" groups.

• IBM is using mathematical modeling to assemble optimal project teams for big IT consulting and installation assignments.

• And facilities management and corporate real estate functions are….. doing what?

U.S. business is no longer simple, and this applies in spades to the management of corporate or institutional worker—and customer-support infrastructures—namely facilities, where dynamic decision-making on literally hundreds of variables can make or break business missions by delaying them (speed), making them too expensive (cost), or killing labor productivity (commitments to the wrong infrastructure). U.S. business is beyond "simple," and that means sophisticated mathematical modeling for analysis and planning is "in," line-by-line number crunching is out.

Look at the "faster" side of the issue. Modeling is indispensable. Intel uses a financial modeling approach to examine big sophisticated facility investment scenarios in a few days instead of what used to take two to three weeks of laborious research and line-by-line number crunching. According to an Intel spokesperson, "These days, if you tell your financial or business-unit people that you'll get back to them with good numbers in two to three weeks, that is no longer good enough."

Look at the "discovery of hidden opportunities" side of the issue. In the case of organizational structures (read: headcount), modeling is indispensable in making connections between large amounts of data to discover profit potentials that are hidden from normal human eye and brain activity and from established ways of looking at and thinking about businesses. How will your facilities management organization need to change if you get out of several leased facilities in St. Louis, consolidate your workforce into a purchased building, and decide on a new outsourcing policy? There are 50 variables involved in coming up with that answer, including the number of people that survive the consolidation, occupancy density, expected churn rates, the amount of different types of space involved (warehouse, office, data processing, research, etc.), the number of shift and non-seated workers, the services that were included in the lease but now need to be provided, which services to outsource, and more. Mathematical modeling is necessary if you are to connect all these variables to find the highest-profit (or least costly) set of decisions.

For more on mission-based modeling of facilities management organizations see the special sidebar: Mission-based Staffing Productivity Analysis.

Heads Matter

It is a long-standing economic rule that the ratio between labor cost and capital over the long term is constant. (Economics 101) If labor costs rise, enterprises invest in automation.  If labor costs fall, such as the availability of low-cost overseas labor, no asset investments are made, and existing capital assets will be abandoned (sold) or allowed to depreciate (de-invested).

No surprise then that the captains of corporations and even academic institutions have virtually only two things they can actually accomplish as captains—1) hiring, retaining, and firing people (labor costs), and 2) raising money (capital). One might add "leadership" to this list to include vision, motivation, and communication, but these elements refer to what? They refer to how captains carry out the captain's job of doing basically two things: hiring and firing (labor), and raising money (capital).

So what do the news headlines tell us about industry captains and headcount? They tell us that heads matter. They tell us, in fact, that industry captains view "heads" as direct mission-control variables. Think about it. When did you ever read the newspaper headline, "Company X (not its real name) to realign cost structure by slashing square feet?" (Retail chains, wholesale distribution outfits, and leasing companies excepted.) Never! No. Here's what you read:

• 2001: Hewlett-Packard to cut 6,000 jobs
• 2005: Hewlett-Packard to cut another 14,000 jobs

• 2004: Eastman Kodak to cut 15,000 jobs
• 2005: Eastman Kodak to cut another 10,000 jobs

• 2005: Kimberly Clark to cut 6,000 jobs

• 2002: Ford Motor Company to cut 35,000 jobs
• 2005: Ford Motor Company to cut 10,500 white collar jobs
• 2005: Ford Motor Company to cut 30,000 production jobs in 2006

• 2005: General Motors announces 30,000 jobs to be cut by 2008

• 2002: Sun Microsystems cuts 8,500 jobs
• 2005: Sun Microsystems cuts another 3,300 jobs

The point is that headcount is the currency that top management deals with in formulating and implementing institutional missions, and it is the main "lever" that it has at its disposal to steer the institutional ship toward those missions. Not square feet.

It is not that square feet aren't important, it is just that in the minds of those steering the ship it is "heads" that matter. Here's the proof: An office worker is worth $60,000/year in costs and probably three times that number in terms of contribution to revenue. The space that worker occupies, with services, costs at most $10,000/year, and more likely around $3,000/year. So you cut the cost of space by 10 percent, what have you achieved? Do the math. It’s not much. Cut the amount of square feet per worker by 10 percent, and you have the same result. But add or subtract a "head"...that's the whole enchilada—wages, benefits, and all the square feet they occupy together. That's why "heads," whether growing enterprises or cutting costs, are the currency of senior-level managers.

The Futures Message in the Headlines

The headlines’ message for the future of facilities management, then, is clear: If you don’t have a sophisticated mathematical model for your facilities function (one that is "heads" or mission-driven) which can stand tall among the model-building being done by your financial department or marketing group, start building one. Start by getting yourself a hot modeler or retain the services of a firm that has hot modelers. Build a business model for facilities that delivers outputs quickly that your customers (inside business units) are on the line to deliver (tons, cars, airplanes, wafers, packages processed, or service-hours delivered).

If your group is dealing in the currency of square feet (as in, "We sure are doing a good job of lowering cost per square foot"), you are not dealing with the key variable that top management is dealing with. Instead, you are on the derivative supply side, like a real estate leasing company. If you are going to be an at-the-main-table contributor to institutional mission, talk "heads." Focus on how many heads will be needed to support the institutional mission. Develop a sophisticated answer to the question of how many facility management heads are needed to support the heads needed for the institutional mission. Pursue lower-cost or non-capital ways of supporting mission-focused heads. Bottom line, heads are and will continue to be a core-mission variable. Plan on it.

(If you haven't done so, refer to the mission-based staffing productivity analysis model illustrated in the sidebar: Mission-based Staffing Productivity Analysis.

By Steven L Westfall, Ph.D., President, Tradeline Inc.