Capital Planning, Resource Allocation and Budgeting

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Capital Planning, Resource Allocation
                      and Budgeting

                    4 3 0 0 W i l s o n B o u l e v a r d , Su i t e 3 5 0
                    Ar l i n g t o n , Vi r g i n i a 2 2 2 0 3
                              The Capital Planning Decision Methodology (CPDM)
                              provides a quantitative and qualitative decision making
                              process for prioritizing proposed investment initiatives
                              based on their relative importance towards achieving
                              organizational goals and objectives. The methodology
                              involves identifying and prioritizing a set of decision
                              criteria and sub-criteria, defining rating scales, and then
                              rating investment proposals against the weighted deci-
                              sion criteria. The outcome is a measure of the relative
                              importance of each investment initiative as inputs to
                              Consolidated Capital Planning and Budgeting decisions.
                              The CPDM model includes resource optimization and
                              budgeting to support more informed resource allocation
                              decisions given a broad variety of budget constraints (e.g.
                              must-funds, project interdependencies, investment mini-
                              mums, and multi-year allocations).

This white paper covers       Ch a llenges of cap it a l pla nning de c isions

                              Capital investment decisions are some of the biggest challenges in planning. Multiple
the best-practice approach
                              stakeholders are involved in the decision, from the users of the capital assets to the
for capital planning, pri-    management team, the operations team, maintenance team, construction, engineering
oritization and resource      planning, etc. There are competing objectives, such as focusing on elements of sustain-
                              ability vs. transformation to meet future needs and there may be other considerations
allocation decisions and is
                              about the environment, safety and security.
vital for anyone involved
                              Decisions have a significant and lasting impact that can often span years. Long-term
in a capital planning or      capital plans are susceptible to continuous changes, so the planning phase has to not
budgeting function.           only prioritize the competing objectives but also be flexible to change.

                              We frequently see organizations that are allowing their metrics to drive capital plan-
                              ning decisions, rather than using them to support those decisions. For example, one
                              common metric is a facility condition index (FCI), or "state of good repair," which is
                              tracked by organizations to assess the state of repair or need of each capital asset
                              in the portfolio. It is very often used as the single point justification for the capital
                              investment priorities, but it doesn't represent whether the proposed capital invest-
                              ments align with or support the strategic needs of the organization.

                              Also, there is a heavy reliance on spreadsheets to track and manage the portfolio. The
                              result is a disconnected labyrinth of manual processes that necessitates a slow budget
                              process. In addition, although spreadsheets are suited for complex calculations by an
                              individual, they are not appropriate for group-enabled multi-disciplinary engagement.

                              So where to begin? Developing a successful capital-planning process requires your
                              organization to link its strategic needs and capital assets in an effective and efficient
                              manner. Long-range planning and a disciplined decision-making process are required
                              for managing a portfolio of assets to achieve performance goals and objectives with
                              minimal risk, lowest life-cycle costs and greatest benefits. It also must promote a
                              multi-disciplinary engagement process-one that combines the needs and consider-
                              ations from across the organization.             Decision Lens Proprietary Information, Copyright 2009                              Page 2
The fundamental purpose of a capital          How to elicit input from and drive          How to identify the key differences
asset portfolio is to plan, acquire and         consensus across the capital-planning        among the projects in order to make
sustain the needed capital assets to sup-       evaluation team?                             the "best value" decision?
port the organization's strategic goals.
                                              How to focus the discussion for             How to know if the project's cost is
Key issues include:
                                                efficiency in the evaluation process,        justified by its benefits?
 How to define the objectives and make         while also elevating the group from the
                                                                                           How to best defend the decision
   the tough trade-offs to determine            hidden agendas and inherent biases
                                                                                             with senior management and with
   the relative value of each capital           that others are bringing to the table?
                                                                                             the stakeholders?
   investment project to the strategic

Case study: Military Health System Capital Plan
Decision Lens worked extensively with         The right resources--Achieve equilibri-    The pr e-D ecision Lens proc e s s
the Military Health System's (MHS)             um between requirements and funding        Prior to the use of Decision Lens, the
TRICARE medical organization to reform         to provide modern, efficient and cost-     MHS focused primarily on the condition
its capital planning and capital invest-       effective MHS capital assets, facilities   of the asset, as measured by the FCI, to
ment process, a long-term multi-billion-       and infrastructure.                        determine which medical facilities to
dollar resource allocation challenge.                                                     invest in.
                                             The MHS needed a process to align the
The collective vision of the Tri-Service     capital investments with its strategic       For example, a hospital in Surrey,
facilities organizations, which brought      objectives and to enable a framework for     England, had raw sewage bubbling up
together Navy, Army and Air Force medi-      the continuous improvement of the MHS        in the basement. It ranked very high on
cal needs under one roof, is to ensure       capital asset portfolio. It also needed to   the FCI because of the poor state of the
that MHS capital assets and facilities       establish a process to directly link capi-   physical infrastructure and therefore
are available when and where they are        tal investments with performance goals       was one of the top priorities in the capi-
needed with capabilities necessary           articulated in strategic and business        tal plan. At the same time, the Ramstein
to effectively and efficiently support       planning and enhance joint operations        base in Germany was a relatively new
Department of Defense missions.              and interagency collaboration.               and advanced facility, placing it lower on
T h e g oal s f o r im provement             There were a number of factors forcing       the capital project priority list.

The MHS Capital Investments Strategic        change on the MHS capital plan--the          However, the relative priority of the capi-
Plan focused on three major goals:           global war on terrorism was a constant       tal investments was not helping the MHS
                                             yet evolving challenge. In addition,         accomplish its key strategic objectives,
 The right capital assets--Locate, size
                                             base realignment and closure, military       including the transformation of how
  and configure facilities and associ-
                                             transformation, force structure changes,     health care is delivered in the military,
  ated infrastructure based on readiness
                                             transitions from global theaters to U.S.     improvement in customer processes, etc.
  requirements and business-case justifi-
                                             installations and a national labor short-    Moreover, the goal of the charter of the
  cation to support the MHS.
                                             age for certain clinical specialties were    MHS and TRICARE is to bring together
 The right quality--Acquire, operate,       having a direct impact on the MHS. These     the various service lines, understand
  sustain, restore and modernize capital     pressures drove transformation across        their needs and combine them into a
  assets and facilities and infrastructure   the MHS with significant implications for    robust solution that would reduce costs
  to provide safe, healthful, responsive,    the entire capital portfolio.                and improve efficiencies.
  cost-effective, efficient and flexible
  environments.                           Decision Lens Proprietary Information, Copyright 2009                           Page 3
T h e De c i s i o n L e ns diffe r enc e       patients. In contrast, the Ramstein base,   and planning process from top to bottom,
The MHS used Decision Lens to evaluate          while the most advanced medical care        making decisions using a collaborative
the multiple objectives across the service      facility, was at the time ramping up to     strategic approach with the relative
lines, and a very different set of priori-      serve soldiers being flown in from the      priority of each of its objectives clearly
ties came to light.                             war at the rate of 400 per week, putting    defined and quantified. It then used
                                                enormous capacity constraints on the        those priorities as the evaluation frame-
For example, the hospital in Surrey,
                                                medical facilities at the base.             work for deciding which facilities
England, certainly had a severe sewage
                                                                                            provided the "best value" against their
problem, but it was very underutilized          Within a few months, the MHS trans-
                                                                                            strategic needs.
and out of the way, servicing only 10           formed its capital investments strategy

T h e s t eps t o s ucc essful de c ision m a king

Step 1: Criteria development
The strategic requirements are evaluated and specific criteria are developed. Both quantitative and qualitative factors are
considered together in the decision process. (See Figure 1)

                         Decision Goal: Prioritize Capital Investments

                                Strategic Alignment
                                    Mission Objectives
                                    Business Plans

                                Improve Customer Centered Processes
                                    Functional Modernization/News Services
                                    Improvement of Existing Services

                                Improve Infrastructure
                                    Improve Condition
                                    Compliance with Code and Policy Directives

                                    Collaborative Synergies
                                    Improve Productivity/Space Utilization
                                    Business Case

                         Figure 1: Hierarchy of criteria                               Decision Lens Proprietary Information, Copyright 2009                         Page 4
Step 2: Criteria evaluation and priorities

            Figure 2: Development of strategic criteria shown in Decision Lens

            Figure 3: Example project alternatives to be evaluated                        Decision Lens Proprietary Information, Copyright 2009   Page 5
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