“With corporations under ever-increasing economic pressure, it’s not good enough to run a safe and productive physical plant,” says Glenn Hodge, founder and principal of Step Function FMC, an real estate and facilities management consultancy based in Chandler, Ariz. “You need to offer added value.”

Opportunities can be found in many places—in the way the budget is created and managed; in the way labor is assigned and contracts are negotiated; in how these functions are measured against internal and external peers; and by implementing lean facility management practices.

Starting the Budget at Zero

The way to get the most out of a budget is for operations to use it as a tool by building it correctly from the ground up, and by making make sure managers at all levels of the organization clearly understand it.

“Following the dollars will lead you to the efficiencies and the opportunities in work practices,” says Hodge. “Most facilities organizations struggle in this realm.”

Part of the struggle comes from the way most budgets are constructed—either by looking at the current year’s fourth-quarter numbers and multiplying by four for the coming year (Q4x4) or by simply adjusting the previous year’s budget by a certain percentage. Neither method adequately accounts for process improvements, project-level details, or changes in mission, organization, or scope. This typically results in a lack of detail and justification of the budget to the end customer, and a failure to clearly identify irregularities.

Zero-based budgeting, on the other hand, requires the organization to start every line item at zero. Starting from zero, the organization must thoughtfully consider how much is needed to accomplish each task in the coming year, taking into account changes in performance or service level, then budget accordingly. The budget must be clearly delineated at the sub-code level, at least when it comes to key functions: payroll, direct and indirect materials, contracts and labor, preventive maintenance and on-call contracted services, and taxes and depreciation.

Once drafted, it is important that the budget not remain strictly the domain of senior management. Front-line managers are the ones spending the money, so it is critical that they have a deep understanding of the budget. Hodge recommends they be trained in the overall budget hierarchy, then conduct monthly variance analyses to stay on top of their spending. This will give them the tools to accurately forecast spending by project and function throughout the year.

He gives as an extreme example a company where two technicians responsible for buying tools for their site were ordering $10,000 a month in hand tools from their integrated supplier, then selling them. Their front-line manager didn’t understand the budget well enough to question the supplier’s invoices, and the theft continued for more than a year before Hodge was brought in to review the organization’s processes and budgeting. The irregularity was discovered when he began delving into each spending line detail during a monthly variance analysis.

“If they had built a zero-based budget, the front-line manager would have known that line,” says Hodge.

Know Who Does What

A major expense in any organization is labor, either in the form of direct employees or contingent workers. Most facilities organizations categorize their labor costs by organization—operations, site services, administrative services—which makes it difficult to parse the true cost of a particular function or asset.

“At Step Function we take the organizational structure and translate it to a functional structure, aligning labor by functions such as building maintenance, utilities, custodial, and café. We look at head count through a filter and say, how do you allocate those resources? We structure a format that can account for the organization’s spending by the different kinds of services it delivers.”

That makes it possible to determine the true cost of maintaining a chiller, for example, whether the work is done by contracted labor, an electrician, or an HVAC technician.

The next step is to look at the way labor is used to carry out each function. Does the organization maximize the amount of wrench time its most skilled workers spend on more technical tasks, or does it allow them to be distracted by day-to-day work that requires less technical expertise?

Another consideration is the organization’s use of contracted labor, which offers several opportunities for savings. First, there is an important distinction between “out-tasking” and “outsourcing.” Generally speaking, out-tasking—bringing in a plumber to unclog a drain, for example—should be used only to accomplish between 12 and 15 percent of the scope of a particular function. Outsourcing—applied to this case, contracting with the plumber to make sure there would never be a clogged drain—is most economical when used to accomplish more than 85 percent of a given function. Both offer flexibility and specialized skills, but are cost-effective only when properly managed to bring in external labor on the fringes—either to accomplish very little of a function, or almost all of it. The internal overhead cost to manage contracted workers starts to outweigh the benefit if their labor accounts for approximately 15 to 85 percent of the task.

The contracts themselves often include hidden costs that drive up the total price. An electrical contractor, for example, will quote a per-job rate that includes a journeyman, an apprentice, and a supervisor—all of whom will be paid no matter who does the work—plus overhead and profit. As the volume of work decreases, the more experienced, higher-priced personnel are often retained regardless of how difficult the work is.

“You will be shocked when you learn what you really pay,” says Hodge. “It is important to have a strategy for how you use contractors, and to understand what drives those decisions.”

It is true that a small change to a large contract can yield a significant savings, but it is important to understand that the biggest contracts are not always the ones that deserve the most attention. Step Function uses a programmatic approach—Priority Matrix Value (PMV)—to find opportunities in a contract by ranking it based on organization-specific criteria, such as mission impact, competitive pricing, current performance, opportunity for bundling with other contracts, and whether the contact is performance based.

“You can’t assume the highest-priced contract is the one that should be scrutinized the most for the best deal,” he says.

Comparing Costs

Once the labor utilization is aligned by function and the true cost of contracts is understood, the information can be used to compare costs incurred by other organizations within the same company, or by other companies. First, those costs must be “normalized” to ensure that a valid comparison is made. Only then can true inter- and  intra-company competitive analysis or “benchmarking” be accomplished.

Labor costs vary by region, for example, so that must be taken into account. In addition, not all facilities space is created equal. Office space can be considered the most “typical.” Based on Hodge’s experience, warehouse space, with lower climate control requirements and maintenance standards, costs about half as much. A data center, on the other hand, costs on average twice as much per square foot as an office, while cleanroom costs are as much as 40 times higher. This concept of Normalized Area Footage (NAF) was created to enable comparisons between different space types and mixes of space.

Other examples of the many factors that influence per-square-foot cost are:
• Service Level Agreement: Corporate headquarters buildings or executive spaces frequently have higher service level expectations than typical office space.
• Location: The cost of real estate, like labor, varies by region.
• Building Layout: Single-story vs. multi-story.
• Site: Are the buildings interconnected on a small campus or separated by miles in a sprawling city?
• Security: Is the facility on a closed campus or an open campus? Is it in a high-crime area?

If the costs of the organization compare unfavorably to those of its peers, the next step is to determine why. Where are the gaps in performance, what are the drivers that create the gaps, and what can be done to close them? Be sure to set the stage correctly to ensure that an environment of “defending my numbers” does not emerge.  This should be positioned as a learning and improvement opportunity.

First look at the process documentation, including customer survey reports, preventive maintenance procedures and frequencies, operational processes, and computerized maintenance management system procedures. Then determine the actual work practices by conducting interviews throughout the organization—including customers, technicians, managers, and suppliers—to learn about everything from scheduling and planning to MRO stores practices. An analysis of current contracts should include terms, supplier expertise, actual cost of labor, and type of governance model.

This information will allow the organization to prioritize by creating a matrix that scales and weighs the company’s key drivers, such as safety, business impact, and cost. A PMV is assigned to all projects to determine what to implement and when, what is most urgent, and which will yield the highest return.

Becoming an Indispensable Partner

Hodge has used these lean processes to identify and realize millions in facilities savings in a variety of industries:

• $7 million annual savings in an electronics packaging company
• $1.1 million of a $9 million annual budget in medical device manufacturing
• $250 million of a $2.1 billion budget over a nine-year period in a high-tech electronics firm

That kind of added value is what improves the facilities department standing within an organization from a service provider to a strategic partner.

“The company will want your input during budget discussions,” says Hodge. “If they need to cut the company’s budget, they’ll ask you what’s reasonable for facilities. When your partner approves your budget, he or she is saying, ‘This is an investment in my success.’”

By Lisa Wesel

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ISSN: 1096-4894