Facility managers have the unenviable challenge of developing robust accommodation business cases at irregular intervals. RODNEY TIMM outlines the main items to consider in support of robust recommendations.
These business cases may be in support of a range of major accommodation changes, including relocations, co-locations and consolidations, lease buy-out options, lease extensions and renewals, own versus lease assessments, sale and leasebacks, and financing options. The fortunate few will have well established company processes and pro forma documentation. But most often the starting point is a blank sheet of paper and a facilities manager needing to decide what to do next: what will drive a compelling case? And what will be required to get the funding approved? And this will need to respond to the needs and perspectives of a range of stakeholders.
Accommodation business cases are usually all about costs. Consolidations and co-locations are seldom driven by generating increased revenues, though operating efficiencies can usually be proven and reflected as operating cost savings. As such the focus of the business case generally revolves around ‘least cost’ options – particularly if the procurement department is driving the agenda – and the challenge is to motivate wider accommodation perspectives.
To contextualise the business case, there should be a short situation analysis and opportunity definition covering constraints, needs and key business objectives. This will be the platform for the evaluation criteria. If the outcome is not to be driven by lowest cost, other non-cost evaluation criteria should be clearly identified. These criteria may include improved internal communications, enhanced workforce engagement, improved amenity, and other operating environment aspects that should not be underrated.
The ‘business as usual’ is normally taken as the base case against which various options are analysed and the preferred option tested. Quite often this may be called the ‘do nothing’ option, but this is seldom true. It is probably likely that something will need to be done to responsibly maintain the status quo. This may include negotiations to extend lease, capital works covering OHS or compliance risks, or possibly minor workspace reconfigurations to improve utilisation densities. So the base case is usually best called the ‘do minimum’ option.
Before getting into the formalised options that are to be analysed in detail it is important to show the readers – probably busy executives – that all reasonable possibilities including innovative and non-asset solutions have been considered. Theses may have been discounted if it seemed evident up-front that key criteria could not be met, or they were obviously not feasible, or the possibilities were just not available. There is always the temptation to leave these out of the business case, but beware: if stakeholders believe these possibilities have been ignored, support for the recommended option may not be forthcoming. To take these possibilities off the agenda it is best to be succinct in description and robust in argument.
The detailed analysis should proceed with the identification and explanation of the viable and realistic options. Accommodation business cases will usually have two, three or four options that are compared against the ‘base case’. These options may be for various buildings, co-location or consolidation scenarios, and/or various tenure and financing options. The detailed cost-benefit analysis and projections of these inputs should all be assessed based on the same general assumptions such as discount rates, materiality and analysis period. Usually the latter will be over the initial term of the lease or the period over which the fitout will be able to be utilised and amortised.
Elements of the business case may include:
- land costs – likely to be incurred for options that involve the development of new facilities
- base building construction and/or refurbishment costs – comparing capital spend over the life-cycle of the asset and the assessment period
- fitout costs – new and refurbished accommodation facilities are likely to require fitting out to meet the accommodation requirements
- information technology costs – probably including upgrades, reticulation on and between floors, and general IT support
- residual values – representing the unexpired capital values of the building’s assets at the end of the evaluation period
- relocation costs – establishment, change management and moving costs will be incurred
- consultant and legal costs – including legal advice, designers, property consultants, etc.
In relocations or consolidations there are likely to be a range of costs associated with the existing premises that will need to be included in the analysis, including:
- make-good costs – based on the obligations contained in the existing lease agreements, either as actual costs (including rental during the make-good period) or the settlement amount to be paid to prior landlords
- lease-tail costs – unless the relocation is managed to coincide with all lease termination dates there are likely to be unexpired lease periods for which rental is to be paid.
Recurrent costs that are likely to be incurred or that need to be accrued over the lease period will include:
- annual rental costs – for leased options including structured and market rent reviews
- lease outgoings and maintenance costs – including future landlord outgoing projections or periodic maintenance costs for owned facilities
- other service costs – including security, cleaning, facilities support, waste services, etc
- tenant incentives – in the form of rent-free periods, capital contributions or rental reductions, but these will need to be accrued over the initial fixed term of the lease in term of accounting standards.
The more subjective part of the options analysis relates to the so-called economic benefits achieved by the company from the co-location or consolidation. The challenge with these benefits (usually relating to efficiencies and productivity gains) is quantification. Examples of these can vary significantly, but may include:
- staff efficiencies – as a result of co-location of activities that could result in fewer technology utilities and reductions in staff numbers; however, any redundancy costs will need to be modelled into the savings projections
- service delivery benefits – these may result in improved customer loyalty and revenues, as well as travel and time savings in communicating with customers
- externality benefits and cost savings – as a result of reduced trips by staff and customers with measurable external benefits, including reduced environmental impacts and operational risks.
Intangible benefits that cannot be quantified in financial terms or monetary values should not be ignored. In the business case these need to be articulated clearly and succinctly. A comparative risk analysis considering the strategic direction, projected future needs, stakeholder acceptance and transition requirements will round off the analysis of the comparative options and, hopefully, will provide clear direction on the best option.
RECOMMENDED BEST OPTION
Set out in the front of the business case will be the executive summary clearly identifying the best option, quantifying the cost implications and detailing the benefits. This summary represents the headlines and lead paragraph of a news article – excessive detail is not wanted. Also, do not fall into the trap of detailing the options and expecting the executives to make a final decision – they will expect a clear recommendation and motivation for their endorsement. As an effective facilities manager involved in a major accommodation project it is important to inform and canvass opinion through the process so that that there are no surprises in the final recommendation. It will be expected that supporting this there will be a project scope, cost plan, implementation plan and program, transition and change management plan, and communication plan.
Successful accommodation business cases do not – in fact should not – be long and contain excessive detail. But the busy executive team will need to have confidence that all viable possibilities have been considered, and that short-listed options have been analysed robustly on the same basis and the recommended option arrived at with reasonable supporting data, detailed analysis and robust argument. Accommodation business cases do not always have to default to the ‘minimum cost’ options. Make sure the cost-benefit analysis is clearly linked back to the all evaluation criteria – and not just cost – as set at the beginning of the project.