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Measuring the Return on Physical Assets FAC IL I T IES ST E WA RD S HIP Measuring the Return on Physical Assets A year ago, Sightlines, LLC began investigating an empirical model to s u p p o rt a change in management perspective for physical assets—to define a management tool to guide physical asset allocation decisions. This tool allows college and university business and financial officers to apply the same analytical rigor to physical assets that they dedicate to financial assets—to be effective stewards of physical assets. By David A. Kadamus 56 • JULY 2001 ampus leaders pride themselves on understanding Current Physical Asset Management Issues the position of their financial assets. The total value • The Tremendous Volume of Campus Spaces That Are of investments, annual return, draw, unrealized gain, Crossing Life Cycles and diversity are all concepts that are well under- • The Simultaneous Renewal, Modernization, and Cstood and easily articulated. However, when asked these same Replacement of Fac i l i t i e s questions regarding physical assets—buildings, grounds, and • The Need for Stronger Management Tools to Manage Assets infrastructure—very few can provide analogous answers even • The Discrepancy Between Planning Information and Desired though their value often exceeds that of endowment. Despite Ou t c o m e s recent investments to address facility needs, deferred mainte- • The Pressure to Preserve Today’s Investment for Tom o r r o w nance continues to accumulate, educational programs are expanding, and the pressure to modernize space is growing. As We believe that campus leaders want improved standards to an industry, higher education does not have an effective grasp guide physical asset management decisions. To realize these on the value of its physical assets, long-term infrastructure managerial desires, leaders must: needs, and operating and financial implications of drastically • create uniform protocols to measure and model asset per- lower life cycles for systems and equipment. formance over time; The fundamental question is: why are physical assets not • establish meaningful benchmarking and cross-institutional managed with the same analytical rigor as financial assets? comparisons; Although business officers clearly desire to unite the operat- • define consistent and quantifiable investment planning tools; ing strategies of facilities managers with the long-term asset • frame long-term understanding of costs for new and reno- management focus of trustees, a mechanism does not exist. As vated space—both the initial cost and the life cycle costs; the economy shifts, and physical asset renewal needs intensi- and f y, business officers must understand the pre s s u res and trade- • adopt plans that rate performance, highlight opportunities o ffs in asset allocation decisions in order to make inform e d for improvement, and direct asset consumption rates choices. rather than manage failures. Historical Perspective New Paradigm Throughout the past three decades, campus leadership has Sightlines has worked with college and university leaders to lacked the proper management tools to understand the impli- develop and test a new management concept. The hypothesis res t s cations of facility asset investment decisions. Often the reality on the definition of four elements of physical asset management: of limited resources and expanding program needs have forced • Reinvestment Rate compromise in infrastructure quality and cuts in operating • Consumption Rate expenditures. • Operating Effectiveness The cumulative effect of financial pressures has placed many • Service Success campuses in challenging situations regarding reinvestment Historically, the relationships between these four compo- decisions. Accelerating modernization cycles have eroded pro- nents have been managed as one-dimensional relationships. gram functionality at an alarming rate. Dramatic changes in Instead, we believe that the dynamic relationship among these financial and research support funding throughout higher edu- four factors drive long-term asset management outcomes. cation have restructured operating budgets. The use of debt to The two charts on this page illustrate this hypothesis of fund renewal and expansion needs is becoming more common. planning interrelationships. Managers need to recognize and The public continues to be concerned that tuition growth encourage the integration of these four areas as a dynamic deci- exceeds inflation. These global issues, in combination with sion matrix. The result will be more informed planning, greater individual campus pressures, have intensified the need for a campus consensus for action, and more effective allocation of new physical asset management paradigm. resources. NACUBO BUSINESS OFFICER • 57 The Return on Physical Assets model (ROPASM) unites, for the first time, the operational concepts of asset life cycles, main- tenance needs, modernization growth, service, and capital investment with the financial concepts of return on investment, profit and loss, and unrealized gains. We have demonstrated These individual metrics affect one another in a dynamic that the endowment management strategies of diversity, risk, fashion. A composite index representing performance within and total return translate effectively to a campus’ physical asset each of the four components of physical asset management is SM endowment and service structure. Risks will and should be determined and juxtaposed upon a single ROPA Radar Scale taken on some assets that are awaiting investment renewal. to better illustrate this interdependence. The overall direction of the campus’ facilities management function can then be effectively demonstrated. The apex of the radar chart represents more undesirable positions while the outer boundaries are ideals—no maintenance deferrals, full funding of capital needs, total efficiency, and complete service satisfaction. ROPASM Analytical Metrics Through self-assessment, individual institutional goals are set for each of the analytical metrics, performance is measured, and action plans are defined. When actual performance is superimposed over goals, a three-dimen- sional decision tool is created as well as a consistent methodology to measure performance over time. Risks should be avoided when the potential failure of systems The Pilot Program threatens the mission or the effective delivery of a program. A pilot application tested these concepts at 15 campuses. Over Ultimately, this model assists an institution in measuring the 38 million square feet and a total physical asset value in excess physical asset risk and reward strategy within both an individ- of $11.1 billion were analyzed. The Boston Consortium and five ual and comparative context. other college participants have played an invaluable role in the Of key importance to this endowment oriented-approach is success of the ROPASM pilot program. The Consortium has pro- how institutions track the controlled deterioration of physical vided the seed funds to bring reality to Sightlines’ philosophies. assets. Similar to the draw on the financial endowment, the asset consumption rate can be quantified by the Net Asset Ratio (NAR)—the rate at which institutions are consuming or build- Asset Reinvestment Rate Asset Consumption Rate ing their physical assets. A Net Asset Ratio of 1.00 represents “Meeting the Capital Needs” “Rate of Maintenance Deferral” equal levels of annual reinvestment and facilities maintenance Funding Capital Needs Equilibrium Annual needs. Deferred maintenance backlogs accumulate when the Reserves Program Growth Needed Funding Cycle Maintenance Operating NAR is less then 1.00, and are diminished when it exceeds 1.00. Gifts Deferred Maintenance Grants Equipment Modernization Needed Funding SM Beyond the NAR, the ROPA model assembles more than 25 Debt Code Compliance Recurring Capital Other individual metrics within the four families of analysis. Each Modernization One Time Capital individual metric defines current activities, performance trends, Operating Effectiveness Service Success and long-range objectives. All metrics have been benchmarked “The Wise Expenditure of Resources” “Customer Satisfaction” to each other. The benchmarks provided a context for judgment Expenditure Quality Actual Trends Program Service Delivery rather than the indicators of a solution. From this composite Daily Service Delivery Benchmarking Satisfaction Energy Efficiency Goals Safety Environmental review a fuller understanding of the institutional, financial, and Space operational issues can be attained. Code Appearance 58 •JULY 2001 oneself over time. In all cases, Sightlines’ st a f f collected source data to assure uniform analytical rigor. With such consistent quan- tification and verification of perfo rm a n c e data, the rating and benchmarking of oper- ational perfo r mance became possible. The need for individual goal setting is paramount to the long-term success and value of any methodology. The measure- The research provided the sound foundation and confidence ment of asset performance with respect to these four elements is to fundamentally rethink the management approach for physi- Sightlines’ fundamental mission in advising institutional lead- cal assets. In the testing of these protocols, campus leaders have ers. Once the annual performance in each area is understood, a confirmed that these tools can effectively shift the management multi-year strategy can be adopted to set long-term goals and philosophy for physical assets just as the shift to a total return measure
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