Real Property Asset Management in the Era of Full Accountability

By Ray Summerell
VP, Corporate Development
VISTA Technology Services, Inc.

There is little doubt that the federal government has introduced the “Era of Full Accountability” into both public and private sector business processes. Within the past three years, there has been a convergence of requirements and regulations related to disclosure controls and procedures.

Initiatives such as Executive Order 13327 on Federal Real Property Asset Management, Base Realignment and Closure, General Accounting Services Board Statement 34, OMB Circular A-123 and the Sarbanes-Oxley Act require America’s executives to integrate and disclose financial and operational performance data. In addition, real consequences will be imposed on those who cannot demonstrate that level of fiscal responsibility.

Interestingly, and perhaps for the first time, the full accounting of assets and their use now truly emphasizes fixed assets such as real property. Organizations are coming to grips with understanding the role real property holdings play in fiscal responsibility and the full cost of implementing organizational missions.

That challenge in turn has spawned a requirement for improved real property asset management, to demonstrate a uniformly high level of performance across all sectors in the integration of financial and mission performance objectives. This new emphasis on real property is understandable: For most organizations, real property assets represent their second largest investment, exceeded only by personnel costs.

This article explains how current and pending legislation, policies, regulations and mandates makes it more important than ever to tie all business assets to the cost of implementing business and mission strategies. It also explains the inter-relationship of operations, financial, Information Technology (IT) and real property business functions as the key to success in this new Era of Full Accountability.

Financial & Management Reporting: An Overview

Governmental requirements now address federal financial and management reporting, specified by several mandates that affect both public sector and private industry:

• Executive Order 13327 on Federal Real Property Asset Management (EO 13327),
• OMB Circular A-123 on Management Accountability and Control (OMB A-123),
• Defense Base Realignment and Closure Act (BRAC),
• General Accounting Services Board Statement 34 (GASB 34), and
• The Sarbanes-Oxley Act (SOX)

It will be instructive to look at each of these requirements briefly. We can thereby begin to understand how real property ties into each requirement and bridges them all to create consistent federal financial policy:

Executive Order 13327 on Federal Real Property Asset Management (EO 13327). Signed on February 4, 2004, EO 13327 creates controls and procedures to promote more efficient and economical use of federal real property assets. EO 13327 requires Executive Branch agencies to prioritize actions to improve operational and financial management of their real property including the cost and time required to dispose of any surplus properties and financial recovery of the Federal investment resulting from such disposal. As part of the President’s Management Agenda (PMA), EO 13327 is indicative of a fundamental rethinking of real property asset management as it affects funding for essential services.

OMB Circular A-123 on Management Accountability and Control (OMB A-123). OMB A-123 requires Federal managers to improve the accountability and effectiveness of Federal programs and operations through enhanced management controls. Policies and procedures are to be established regarding program results; use of resources to support agency missions; safeguards from waste, fraud, and mismanagement; and collection and maintenance of reliable and timely data for decision making.

Defense Base Realignment and Closure Act (BRAC). Initially enacted in 1990, BRAC is a Congressionally-mandated requirement to collect, analyze and report on facilities that support operational missions. The BRAC round to conclude in 2005 will involve the entire Department of Defense (DoD). The Secretary of Defense estimates that as much as 25 percent of the DoD’s real property inventory may be in excess of mission requirements.

General Accounting Standards Board Statement 34 (GASB 34). GASB 34 establishes financial reporting standards for state and local governments that receive federal grant monies. Governments are called upon to report all capital assets, including infrastructure assets, in their government-wide statement of net assets, and to report depreciation expense in their statement of activities.

The Sarbanes-Oxley Act (SOX). The Sarbanes-Oxley Act of 2002 includes provisions addressing audits, financial reporting and disclosure, conflicts of interest, and corporate governance at public companies. Disclosure controls and procedures must be developed and applied to a company’s transactions as well as its assets—both financial assets and fixed assets such as real property.

Managing change and optimizing data

Each of the preceding initiatives indicates the importance of real property asset analysis in the financial activities of public and private sector organizations—now and in the future.

Executives in both arenas support real property asset analysis and management as means of better understanding the integration of financial and operational objectives. According to Ron Burton, vice president, Advocacy & Research for BOMA International, a leading association serving the commercial real estate industry:

“Analysis of federal facilities and infrastructure, including buildings, is a key first step to mirror effective and efficient facility and property management techniques employed in the private sector. The private sector has long looked to its facilities and infrastructure to increase efficiency and reap cost savings.”

According to David Yentzer, former director of Installation Planning Division, Headquarters, Department of the Army, assistant chief of staff for Installation Management:

“Real property asset analysis is absolutely critical to the government or any other enterprise. A correctly sized and properly maintained infrastructure makes operations more efficient, and reduces the bills associated with maintaining excess infrastructure.”

As we’ve seen, the new regulatory environment has created some of the most profound change encountered in today’s business finance environment. What is the process to manage change in this environment?

Seasoned executives understand that business success combined with full accountability means the skillful interplay of mission and business strategies, financial tracking and real property portfolio management. Business and mission strategies are fed by solid auditable costs and investment management, along with an optimized facilities and infrastructure portfolio. (see Figure 1.)

Figure 1: Managing change in the Era of Full Accountability requires the interplay of management, financial and real property objectives.

Those three objectives, however, cannot be attained without the sharing of data optimized for the particular business in question. An IT component must be taken into account as well.

The development and maintenance of shared, optimized data is the product of the interplay of three categories of business functions. Both business metrics and economic analysis are supported by finance leaders in the enterprise. Real property executives are responsible for the operations of the real property portfolio; additionally, they are tasked with tracking asset utilization and being the stewards of the data that arises from such tracking.

Finally, Chief Information Officers or other IT professionals must be included to ensure the integration and management of this optimized data. Further, they must ensure that the data systems are designed to comply with existing technology standards and can accommodate data migration or interoperability requirements. (see Figure 2.)

Figure 2. Change management (as previously illustrated in Figure 1) requires optimized data sharing across the enterprise. Three different categories of business functions contribute specifically to this data optimization.

A variety of enterprise-class IT tools are used in organizations to capture and maintain data related to this level of critical decision-making. Those IT tools, however, typically operate down a vertical category.

That is, modular applications exist for finance management, asset management, space management and human resources management. Geographic Information Systems and similar tools feed one or more of these types of application modules. Unfortunately, there are no commercial off-the-shelf tool sets that look across this range of management functions to identify trends that support the integration of information across business functions as illustrated in Figures 1 and 2.

The inter-relationship of data on that level requires the adoption of a methodology for real property asset management. Such a methodology considers not only business strategy requirements, but the real property assets that an organization maintains to support those business strategies.

A cyclic methodology for asset analysis

The methodology described in the following section provides a general way of looking at the problem of real property asset management. It is comprised of four phases:

• Capacity Analysis
• Mission Value Analysis
• Scenario Analysis, and
• Execution

Figure 3 (below) illustrates the key aspects of this methodology.

Figure 3: The four phases of a real property asset management methodology. Note that these phases are cyclical, and can have a cascading effect, as new or evolving requirements in the Execution phase may dictate a new Capacity Analysis.

Capacity Analysis involves an inventory of all real property and a determination of the accuracy of data. You thereby gain an understanding of whether you have the capacity to accomplish all of your business, mission or operational objectives.

Mission Value Analysis addresses the understanding of the significance of what you possess in the context of how it contributes to fulfilling an organization’s business or mission. It includes the long-term durability or value of real property assets to the organization over time.

In Scenario Analysis, “what-if” scenarios and similar constraints are applied to those aspects of capacity with true mission value. In other words, given the information provided by Capacity Analysis and Mission Value Analysis, and given that it may be possible to reduce real property holdings without compromising future functions, what specific types of changes can be made throughout all real property holdings that are the most cost-effective?

Execution involves such functions as developing applications to support management of excess property disposal; monitoring the proper execution of all programs related to the initiative; creating an audit trail of implementation activity; and tracking current and previous activity against changing requirements. The Execution phase of the methodology is invaluable in ensuring that an agency has the information necessary to demonstrate a high level of compliance with new accountability requirements. It is at this point in the methodology that systems are developed ensuring optimized data sharing across functional enterprise areas.

It is important to note that this real property asset management methodology is cyclical and iterative. Continually evolving legislative and regulatory requirements will create set new performance measurements for organizations, which in turn may—and likely will – necessitate a revised Capacity Analysis.

The shape of things to come

While the various orders, legislation and recommendations outlined in this White Paper do indeed suggest a new way of thinking about real property, is this simply a platform issue for the current administration, or the bellwether of real change?

Certainly legislation such as SOX imposes real consequences on mismanagement, fraud and inappropriate use of assets in the private sector. EO 13327 and OMB A-123 similarly seek to ensure more responsible use of assets in public sector mission fulfillment.

More importantly, however, the public sector’s move to streamline operations regarding assets and program costs will not be concluded with these initiatives. A seminar conducted in February 2005 by the federal market analysis firm INPUT included participation by Congressman Tom Davis (R-VA), the re-elected Chairman of the House Committee on Government Reform. During the seminar, Congressman Davis supported EO 13327, but stated that the order was merely the first step in the right direction. He reminded the seminar’s capacity audience of federal real property managers and government contractors that EO 13327 was preceded by House Resolution 2545, titled the “Real Property Asset Management Reform Act of 2003”; that act had become stalled in a “jurisdictional dispute” among Congressional committees.

Davis was adamant that he would re-introduce real property asset management in Congressional legislation for adoption in 2005. True to his word, this past summer, the House of Representatives introduced HR 3134: “The Federal Real Property Disposal Pilot Program and Management Improvement Act of 2005” to give the Executive Order more teeth, and to provide incentive for compliance with the order. Under the proposed five-year pilot legislation, a percentage of the proceeds from the sale of surplus real property inventory would be returned to the affected agency, rather than transferred entirely to the general Treasury funds.

The long-term result of this new legislation presents the new paradigm for doing business with government.

In short, momentum is building. Both business and government organizations would be well advised to begin strengthening their understanding of what’s required to excel in real property asset management.

By examining business and mission requirements, creating auditable cost and investment management strategies, and optimizing facilities and infrastructure portfolios, any organization can realize sustainable success in real property asset management. Most organizations undertaking such analysis see real gains in:

• Real Property Operations: Reduced and fully auditable operating costs
• Real Property Use Optimization: Reduced vacancy rates and improved fulfillment lead time
• Portfolio Management: Managed value, auditable benefits and costs
• Demography: Better balance, reduced churn and move costs

These benefits in turn enable companies to make better informed decisions related to business and mission strategies. The sharing of optimized data across functional business areas ensures that the disclosure of financial data is complete, verifiable and authenticated.

And all those benefits taken together are what define the requirements for any business organization to be successful in this new Era of Full Accountability.

Ray Summerell is vice president of Corporate Development for VISTA Technology Services, Inc., a Herndon, Virginia-based provider of real property asset analysis, Information Technology and management consulting services, (www.vistatsi.com). He can be reached by email at ray.summerell@vistatsi.com or call 703-561-4100.