Leap Into Future Space

March 1, 2000
Available Tools and Technology Make the Workplace More Productive and Efficient.
A new concept is giving hope to frustrated CFOs, facilities executives, and designers: “Future Space.” It borrows some ideas from the past, takes advantage of an impressive array of new technology, and gives professionals tools to cope with one-dimensional, cost-cutting tactics.

To understand what’s taking place, a little history is helpful. A love-hate relationship with the workplace has been prevalent for some time. On one hand, companies like ALCOA and Owens Corning are singing the praises of how their new headquarters have increased employee productivity. Conversely, other companies are dramatically reducing the size of their physical workplace as a way to cut costs. Still some are using alternative office strategies, such as hoteling and telecommuting, to work — anywhere but “here.”

The effects of the workplace on individual productivity, team productivity, job satisfaction, and, therefore, the bottom line are significant. After the expense of people, the workplace is often the largest and most visible cost of doing business. Every dollar that can be cut from operating the workplace goes directly to a company’s bottom line. Take a look at the 100 largest companies in the United States as ranked by revenue: It takes $10.34 in revenue and the commitment of $14.99 in assets to generate $1 of profit. By comparison, cost cutting is either no cost or a low-cost investment.
As the basis for an upcoming book, Michael Brill and the Buffalo Organization for Social and Technological Innovation’s (BOSTI’s) latest research (involving 12,000 people in some 70 organizations) reveals the workplace’s contribution to the bottom line is greater than we thought. The design of the workplace affects individuals’ productivity, creativity, collaboration, and teamwork. (See Contributions, based on Design of Workplace, page 11-BI.)

Brill concludes workplace design is a productivity tool, and the benefits of an “appropriately” designed workplace encompass 3 to 15 percent of an annual salary. However, just as important is BOSTI’s confirmation that the workplace can either enhance or detract from employee productivity. Do it right, you get a benefit. Do it wrong and it will cost you dearly.

To put this into perspective, look again at those 100 companies. The median profit per employee is $30,368. Assuming an employee salary of $48,000, the benefits of an “appropriately” designed workplace range from $1,440 to $7,200 per employee, or 4.7 to 23.7 percent of profits.

While the workplace is clearly a business tool, we are discovering that many companies often spend more than necessary on projects, yet achieve less. We also see companies that don’t spend enough. The addition of a few extra dollars per square foot — usually an amount less than one year’s operating costs per square foot — is enough to make significant impact.

Time is MoneyProject stalled? Apply the opportunity test.By Alan Whitson, RPADo you enjoy missing an opportunity to save your company money? Of course not, but companies all around the world let millions of dollars slip through their fingers every day. Why? They either ignore or fail to understand the time value of money and its impact on their facilities.
Rule one regarding the time value of money is straightforward: “More is better than less.” Who wouldn’t want $200 rather than $100? It’s the second rule, “Sooner is better than later,” where the understanding can get fuzzy. Given the choice between getting $100 on January 1 or waiting until the end of December to receive the money, which is better? Take it January 1, because you could invest the $100 for a year and earn interest. By waiting until December, you give up the opportunity to earn that interest. The financial buzzword for this concept is “opportunity costs.”
Where it gets fuzzy is when you have choices like these:
A. Getting $100 on January 1 and investing it at 5.75 percent per year.
B. Waiting until December 31 and receiving $120.
C. Getting $100 on January 1 and loaning it to your brother-in-law who promises to pay you back in December with interest.
Some quick arithmetic leads one to select “B,” even though in “A” it’s clear that receiving $100 on January 1 is “sooner” than December 31. However, getting $120 on December 31 is “more” than $105.75 — the $100 plus the $5.75 of interest earned during the year. Alternatively, it would take 3.26 years for “A” to grow to $120. However, if the $120 in option “B” could be reinvested at the 5.75 percent per year in option “A,” it would have grown to $136.16 during the same time period as it took option “A” to grow to $120.
In short, option “B” will earn more money sooner that option “A.” That’s what the time value of money is all about — knowing which opportunity creates the maximum value over a given time period.
Frequently, facilities professionals talk about projects designed to reduce costs being delayed due to concerns about the “capital budget process.” As the story unfolds, it appears you’re listening to dialogue from Alice in Wonderland: “We can’t afford to save money. There is nothing in the budget for it. You’ll need to put this project in next year’s budget.”
When given an opportunity to save money – just do it! “There is nothing in the budget for it” is inside-the-box thinking. Many facility projects can be funded outside of a company’s traditional capital budget process. Energy-efficiency projects, for example, provide a quick and predictable positive cash flow from lower energy bills, allowing them to be funded through performance contracts or off-balance sheet leases. Items that reduce churn costs, such as modular walls, raised floors, structured cabling systems, and carpet tile, can also be leased. Leasing offers the ability to change a lump sum capital expenditure into a series of operating lease payments.
Let’s examine a real life project that would reduce operating costs and analyze the impact of delaying the project until next year’s capital budget cycle. (See Impact of Project Delay, page 11-BI.)
Whether the project is done this year or next, the annual savings don’t change. They’re still $360,000 a year. Over a five-year period the cumulative savings would be $1.8 million. However, delaying the project one year would reduce the five-year savings to $1.44 million (the $360,00 not saved during the one-year delay. What the analysis in this table is missing is the consideration for the “opportunity cost.”
Companies don’t sit on their cash; they invest it in many ways until the business requires that cash. Even then, when investing in the core business, that cash must earn a minimum rate of return — often called the “hurdle rate.” Many corporations use a “hurdle rate” of from 18 to 20 percent.
For this analysis, use 20 percent as the investment rate for our annual savings. Reinvesting the $360,000 in annual savings at 20 percent per year for five years, the cumulative savings grows to more than $3.1 million. However, delaying the project’s implementation one year reduces the project five-year savings by $887,651 — almost the same as the initial cost of the project!
Of course, by delaying the project one year the company could earn interest on the $900,000 that the project cost. Using the one-year treasury rate (5.75 percent) would be appropriate considering the issues of timing and risk.The interest earned on the $900,000 would be $51,750; even at 20 percent, the interest earned would only be $180,000 — half the annual savings. Clearly, it’s in the company’s best interest to do this project now.
Every day, opportunities arise to reduce costs. The sooner one starts to save, the more one saves, and the greater the opportunity to reinvest the savings. As the adage goes, “Time is money.”
Alan Whitson, RPA is CEO of B. Alan Whitson Co., Newport Beach, CA.“The question is no longer how little or how much should companies spend on the workplace, but where should the money be spent on the workplace?” says Alan Whitson, a leading facilities and relocation consultant, based in Newport Beach, CA. This question is the basis of an intriguing seminar series traveling the United States called Future Space. Whitson, as seminar leader, spends a half-day on strategies that will “Make Your Facilities Ready for the 21st Century.”Traditionally in the United States, companies use cost cutting as a way to restore or enhance profitability. The first step is to slash payroll; step two is to cut all other expenses. Since the workplace is so visible, it is often a major target. This has fostered a number of metrics for the workplace that often causes more harm than good, according to Whitson. An example is the fixation on lowest possible first costs — rather than life-cycle costs. Whitson cites the example that the present value of a building’s operating cost over 40 years is typically 150 percent of its initial cost of construction. This type of thinking may explain why the U.S. Environmental Protection Agency (EPA) estimates that the energy bill for the nation’s commercial buildings could easily be reduced by 22.3 percent.Contributions, based on Design of WorkplaceImpact of Project DelayBuilding Size:
720,000 Square FeetProject Costs:
$900,000 ($1.25/SF)Annual Savings:
$360,000 ($0.50/SF)Cumulative Savings: Years 1-5
$1,800,000Cumulative Savings: Years 2-5
$1,440,000Annual Return on Investment
40%Internal Rate of Return 31.58% Whitson believes proper implementation of life-cycle cost strategies will result in improved financial performance for most corporations and higher performance at non-profit institutions such as universities. The benefits of the life-cycle cost approach are far larger and much easier to attain when implemented at the onset of an expansion or modernization project, rather than half-way through or at the tail end.“Do you want to provide a workplace that enhances employee productivity and, therefore, the bottom line with little or no cost premium?” Whitson asks. “Then you use life-cycle costing and take full advantage of the technological breakthroughs in systems solution products: movable walls, raised floors, structured cabling systems, carpet, HVAC, lighting, sound control, and systems furniture.”Glenn Fischer is a principal at Corporate Realty, Design & Management Institute, based in Portland, OR.
Finding Money for Your ProjectBy Alan Whitson, RPA

Inside corporations, departments battle over getting their projects funded. Even if a project has an internal rate of return (IRR) greater than the company’s “hurdle rate,” it doesn’t guarantee funding. Early in the capital budget process there are often more projects than project dollars to go around. Funding approval doesn’t mean that a project will get 100 percent of the funds requested. Fortunately for the facilities professional, there is an alternative for funding.
The savvy facilities executive knows many of his projects, particularly energy-related ones, are unique within the corporation. Not only do they include the ability to reduce operating costs and improve the company’s bottom line, but they also can be funded independently from the company’s traditional capital budget process.
What makes energy-efficiency projects unique is they result in quick and predictable positive cash flow as they reduce energy bills. This allows them to be financed with conventional and unconventional funding methods. In fact, a whole sub-industry has evolved to finance energy-efficiency projects. This, in turn, has generated more interest in financing other components of the workplace, such as modular walls, raised floors, carpet tile, structured cabling systems, and systems furniture.
The following is a breakdown of available financing options. For the purpose of simplicity, it is limited to energy-efficiency projects. However, alternative funding options are available for other major workplace systems, either through the manufacturer or a third party. The four most common financing options are cash purchase, conventional loan, leasing, and performance contracting.
• Cash Purchase. The simplest funding method is to pay cash; this is often called a capital improvement. The company pays for 100 percent of the project from company funds. The advantage is the company gets all the tax and depreciation benefits and the energy savings. The major disadvantage is cash that could be used to expand the company’s business is tied up in equipment and services. Projects that pay for themselves in one to two years are usually purchased with cash. Larger, more complex projects often require a different financing method.
• Conventional Loans. Another funding method is a loan. Lenders may require up to a 40-percent down payment for an energy project. The company’s ability to borrow will depend on current debt load and credit worthiness. Such loans offer tax and depreciation benefits, and the savings from the upgrade can be used to pay back the loan amount. The disadvantage is that it reduces the company’s ability to borrow and to fund other projects.
• Leasing. The advantage of leasing is to spread the project costs out over many payments rather than a lump sum. These lease payments are often lower than loan payments and little or no capital outlay is needed. There are two types of leases: Capital leases are installment purchases of equipment. The company will eventually own the equipment and may take deductions for depreciation and the interest portions of the payments. Operating leases are often called “off balance sheet financing.” The lessor owns the equipment and the equipment is “rented” for a fixed monthly fee during the contract period. As the lessee, the company deducts the rental payments as a business expense and the lessor claims any tax benefits with depreciation of the equipment. At the end of the lease, the company can purchase the equipment at fair market value (or a preset amount), renegotiate the lease, or have the equipment removed. Leases are complex and laws and regulations change frequently, so expert advice is needed. The criteria for whether a lease is a capital or operating lease is defined by the Financial Accounting Standards Board (FASB) Statement No. 13.
• Performance Contracting. This has become an increasingly popular project funding method. A performance contract can keep the cost of an energy cost reduction project off a company’s balance sheet; it can be done with no up-front cost to the company and costs are paid out of the energy savings. The service provider, often an energy service company (ESCO), obtains funding and assumes the performance risks associated with the project. Performance contracts are sometimes called “shared savings” or “paid from savings” contracts. This refers to how the company’s payment for the upgrade is made. Under “shared savings,” the savings are divided between the company and the ESCO according to a percentage. If there are no savings, the company pays just the energy bill and owes the ESCO nothing for that period. With the “paid from savings” method, the company pays the ESCO a set amount each month (for example, 80 percent of the expected energy bill before the upgrade). The ESCO then pays the energy bill and retains the difference between the company’s payment and the actual bill. If there is an increase in energy usage, the ESCO must make up the difference.
In the past, the ability to get a project funded at the appropriate level was a critical success factor for every project. Many of the current facility problems are the direct result of inadequate funding, which forced the use of sub-optimal facility solutions. Today, the facilities executive has the option of using financing methods outside of the company’s traditional capital budget process. n

Alan Whitson, RPA is CEO of B. Alan Whitson Co., Newport Beach, CA.

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