Looking into the Future with Total Capital Planning Software
EP Editorial Staff | October 1, 2004
Maintenance managers may be a valuable information source for financial managers involved in total capital planning.
Maintenance managers are constantly looking for new ways to communicate value propositions to senior managers. Part of the communications gap lies in the fact that senior managers generally look 5-10 years into the future, whereas maintenance managers are primarily focused on the next 1-2 years.
Most organizations go through large surges of capital purchasing, followed by a settling-in period. Looking at a sample of public infrastructure building over the past century, the patterns are clear (Fig. 1).
Renewal spending surge
The post-war building surge has required a certain level of maintenance spending—but all that is about to change. The average age of public assets in North America is 50 years, and the typical renewal lifespan for components in a building is 50-60 years. Thus, over the next 10 years, renewal spending is naturally going to go through the same surge that initial asset spending went through 50 years ago. Just as school requirements follow demographic trends—high birth rates require a large number of schools 5 years later—renewal spending increases a fixed amount of time after asset creation.
The same principles apply to younger organizations, just in different categories. If a company replaced 10 of its boilers 20 years ago, and those boilers have a 25-yr lifespan, the company will face a large renewal spend in 5 years. These clusters of renewal spending also may occur in completely unrelated categories. In 6 years, the same company may be facing the failure of three HVAC systems, four electrical subsystems, nine roofing systems, and a group of exterior windows.
This kind of future spending cluster is beyond the operating radar of most maintenance managers. But knowing about it is crucial for financial managers, who often work in the 5-10 year range, and demand more choices about how to deal with upcoming spikes in renewal spending. With longer expenditure planning profiles, they can choose to decommission facilities, drop or sell product lines, seek interest advantages on future borrowing, and so on. The more warning financial managers have of upcoming spending spikes, the more options they have.
If maintenance managers are able to effectively communicate their company’s long-term capital renewal requirements, they are already speaking the financial manager’s language. If they can warn the organization of approaching spikes in renewal spending, they make the leap from reactive to proactive communicators. The further ahead they can look, the more they will be able to help their organizations avoid dangerous and reactive capital spending by exercising proactive capital renewal options. It almost goes without saying that their value within an organization also will increase and be perceived as more strategically important.
Gathering the data
The process of transforming multi-year renewal planning from an art to a science can be called total capital planning (TCP). Assuming that this kind of predictive ability is worthwhile, how can it be achieved?
First, a comprehensive asset inventory must be acquired. Some organizations already do this by sending out auditors on a bi-annual or annual basis to review the existence and condition of their major capital assets. To really be able to bring TCP into play, however, there are a few other pieces of information that need to be gathered, specifically installation date, theoretical life, and replacement cost. (This does not need to be done for every nut and bolt on-site. There are different levels of cutoff for capital spending—one rule of thumb is to exclude any asset which has a replacement cost of less than $10,000.)
Once this information is obtained, managers are in a position to begin exploring future spending requirements. For instance, looking out into the next 10 years, they might see potentially catastrophic spending variations (Fig. 2).
This kind of information is crucial for financial managers. If they cannot see these trends, they will be unable to plan for the staggering differences between the 2006 requirements ($200,000) and the 2009 ($2.4 million). They will be forced to make hasty decisions as renewal requirements spiral upward, without necessarily knowing that those requirements drop by almost three quarters in the next year.
There is no doubt that if any financial manager could snap his fingers and have this data, he would do so. However, in the real world, all funding must be justified, and so it is important that managers have a strong understanding of the financial drivers for instituting TCP.
Bulk purchasing. With airlines, the further ahead a traveler can book, the better the price. Similarly, being able to examine renewal requirements 5, 10, or more years out gives managers strong leverage when it comes to negotiating bulk purchase orders with vendors, or interest rates with lenders. This can help cover the additional costs of implementing TCP. To get the most value out of this strategy, however, it is important that organizations categorize their assets by type (Fig. 3). Within limits, the finer the definitions, the more that can be saved.
Facility assessment deferral. By prepopulating a database with known life cycle data, it is possible to be able to reduce or eliminate on-site assessment time and minimize bottom line costs. A good rule of thumb is to avoid performing inspections on any asset which is more than 5 years away from the end of its modeled, theoretical life. (Some organizations may have entire sites which fall into this category.) When an auditor does go on-site, he or she can ignore assets which have a long way to go before they need replacing. This reduces costly on-site time by bypassing assets until they age further.
Capital savings. If financial managers know years in advance that they are going to need significant additional funds for renewal, they can negotiate lower interest rates, or avoid getting into costly capital projects which will draw money away from upcoming renewal needs. Subject to analysis, it also may be possible to mitigate some renewal needs by decommissioning facilities or converting them to other uses.
Singularly, or in combination, the above strategies should more than cover the costs associated with gathering the additional data for TCP.
Software. Gathering, interpreting, and reporting on this volume of data usually requires a software solution. This raises the costs of implementing TCP, but it also increases the opportunities for savings.
Where applicable, capital renewal events should recycle themselves. For example, pushing events (projected capital requirements) out of a TCP system and into a computerized maintenance management system (CMMS) will ensure that these events can be tracked to completion in a familiar environment.
Once the work orders are completed in the CMMS, the TCP system should recycle them back into the future, ideally using the actual cost. Thus, a boiler replacement might be modeled as costing $200,000, but come in at $225,000. When the event is recycled into the future, the real-world cost should be used to represent the event in a specific year based on its theoretical life. In this way, the more a TCP system is used, the more accurate it becomes. Similarly, events can be pushed to a project management system, and then recycled as the projects are completed.
What to look for in a TCP
A number of functions should be present in TCP software:
- Event recycling. When a renewal event is completed, is it re-created? Does the recycled event use real-world costs/theoretical lives?
- Modeling and costing expertise. Does the software create the draft database without requiring on-site visits?
- On-site assessment tool. Will it reduce on-site time and errors?
- The ability to explore spending scenarios. Will it calculate “If I increase renewal spending by 5 percent” for example?
- Project management. Will it allow bundling events into capital spending projects?
- Easy integration into existing systems
- End-user/DBA customization
- New information tracking. Can the software be easily configured to do so?
- Strong security features. Can data integrity be maintained as capital requirements and projections are very sensitive to the organization?
The internal sell
To determine if there is a benefit from TCP, the most important step is to review how much an organization is spending on facility assessments.
This is typically where the greatest and most immediate cost savings can be found. If some or all of the investment in a TCP system can be recouped quickly by reducing these assessment costs or improving capital purchasing practices, the value proposition should be presented to financial executives. Include spending clusters that might affect the organization, as well as a preliminary return on investment on anticipated savings.
As North America’s facilities and infrastructure age, renewal requirements will dramatically increase from historical levels. In 10 years, organizations may well be largely defined by how well they anticipated and responded to this growing need for renewal capital. Putting a TCP process in place before assets end up on life support will greatly increase the chances of being counted among the survivors. MT
Stefan Molyneux is the director of technology at Physical Planning Technologies (PPT), 1595 16th Ave., 4th Floor, Richmond Hill, ON L4B 3N9; telephone (905) 764-2440