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A Capital Investment Decision-making Model

By Jim Turner

I was reading an article about selecting a service provider in a trade magazine this week.  One of the article’s call-outs noted, “Developing a matrix with weighted criteria can help identify the most qualified providers.”  As a consultant, I use matrices all the time to facilitate the decision-making process with my clients, so I was enticed to read the whole article to find out more.

Unfortunately, there wasn’t a lot of detail about the author’s proposed evaluation matrix:

“…for example, on a scale of 1 to 10, having a LEED Accredited Professional credential may be worth three or four points, while being a certified energy manager may be worth 10 points.”

I would have liked to see more detail than this; it reminded me of a presentation I gave earlier this year at the Facility Decision conference in Las Vegas, called Case Studies in Asset Management.

This presentation was focused on the decision-making process for capital investment projects, and examined case studies from the US Army Corps of Engineers, NASA, a power company, and several other organizations.  It drew from an ASTM procedure called “Standard Practice for Asset Utility,” which describes a matrix-based mathematical process that I won’t go into detail about (despite the temptation to do so!).

Suffice it to say, most real estate and facilities management professionals have to deal with budgetary pressures when making decisions about which projects to invest in.  These create a fairly common set of challenges:

• A shortage of resources/funding for renewal
• Emerging business continuity and renewal needs
• Underutilization due to changes, realignments, and the introduction of new workplace tools and technology
• Financial, historical, political, environmental, and institutional difficulties for aligning and disposing assets

Five Step Process

The Case Studies presentation outlines a five-step process that addresses these common challenges by designing a prioritization matrix and using it to facilitate group decisions.

Criteria Brainstorm

After the business decision is identified, in step one, the manager brainstorms the criteria to be used in the decision.  In the magazine article, the example was about green credentialing, but there are usually a range of requirements to select from – credentialing can be important, but there are often business continuity aspects (does the facility need to be available on a 7/24/365 basis), or core business activities (we need locations that are convenient for our customers) that should come into play.  In practice, I usually encourage my clients to identify no more than five to seven criteria for the evaluation.

Criteria Definition

In the second step, the criteria are defined further so that a scoring scale can be easily applied.  I’ve found that using a 1 to 10 scale can lead to inflated scores that are not well differentiated, so I usually go with four or five ratings, from lowest or worst to highest or best.  These should be quantifiable factors and easily distinguishable from each other; if the criteria is business continuity the highest factor might be “no outages can be sustained” and the lowest “outages for a month or longer can be sustained.”  Intermediate factors might describe outage tolerance in terms of minutes, hours, or days.

Criteria Weighting

The third step involves weighting the criteria against each other.  If you are dealing with a critical facility, such as a data center, continuity may be more important than access to customers.  If you are dealing with a production oriented facility where industrial processes are housed, employee health and safety or materials security and handling may rise in importance.  The goal of this step is to address the relative importance of the selected criteria against each other, and assign a factor to the criteria scores for each facility being evaluated.

Criteria Evaluation

If a group decision is required, step four is where the fun begins:  here we assemble the group that is responsible for evaluating the criteria.  My practice has been to assemble a senior team comprised of representatives from most of the internal organizations – people who are able to score assets for the entirety of the organization (i.e., what is best for the entire business, not the scorer’s individual concerns).  I usually prepare some background materials in the format of one-pagers to familiarize this group with the process ahead of time, and do a brief review of the background material as the group assembles for the scoring work session.

Scoring

In the final step, the group works through the list of facilities or other decisions, scoring each against the criteria and evaluation factors.  An evaluation index is compiled from this effort by summing the scores, as adjusted by the weightings, so that the outcomes can be easily ranked against each other.

In the best situation, this output can be used “as is” to guide investment decisions, but sometimes the group will need to go back and adjust schedules using it as a guide.  This second pass is used to fully explore complicating factors and produce the final project schedule.  The groups I’ve worked with have had to do this because they didn’t have the senior project management staff to execute all of the projects as they were ranked – for example, there were too many electrical upgrade projects that would have to be done simultaneously – or because several highly ranked projects included long-lead materials that weren’t readily available.

Sometimes, the recommendation comes down to one person’s analysis because it can’t wait for a management group to convene, or because the decision is simpler than ranking a series of capital investment projects.  In a case like this, using this matrix-based process will help produce a more defensible, and maybe even more workable decision, which should speed approval by management and executives.

Final Thoughts

Thanks for reading this, our 17th FM Notes from the Field post.  If you would like to receive a PDF version of the Case Studies presentation I mentioned above, please drop a note to me at jim.turner@iwmsnews.com.  Meanwhile, if you would like to offer some insight from personal experience, we welcome those contributions as well.