Executive Guide: Leading Practices in Capital Decision-Making (Guidance,
04/01/1998, GAO/AIMD-98-110).

Federal spending on major physical capital investments is expected to
exceed $68 billion in fiscal year 1999. Although agencies historically
make large numbers of capital acquisitions each year, past management
problems and years of budget restraint have led to an increased focus on
strengthening capital decision-making and management. To help make
federal investments in capital assets more effective, the Office of
Management and Budget and GAO have been seeking to improve
decision-making regarding the purchase of new assets and infrastructure.
The goal is to give taxpayers the highest and most efficient returns and
ensure that existing assets will be adequately maintained. This
executive guide identifies organizational attributes that are important
to the capital decision-making process as a whole, as well as capital
decision-making principles and practices used by outstanding state and
local governments and private industry.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-110
     TITLE:  Executive Guide: Leading Practices in Capital
	     Decision-Making
      DATE:  04/01/1998
   SUBJECT:  Private sector practices
	     Information resources management
	     Strategic planning
	     Agency missions
	     Cost analysis
	     Federal procurement
	     Information technology

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GAO/AIMD-98-110

Cover
================================================================ COVER

Accounting and Information Management Division

April 1998

EXECUTIVE GUIDE - LEADING
PRACTICES
IN CAPITAL DECISION-MAKING

EXPOSURE DRAFT

GAO/AIMD-98-110

Leading Practices in Capital Decision-Making

(935230)

Abbreviations
=============================================================== ABBREV

  BASE - Business Agreement for System Expenditure
  CEC - Corporate Executive Council
  CEO - Chief Executive Officer
  CIO - Chief Information Officer
  DOT - Department of Transportation
  FASA - Federal Acquisition Streamlining Act
  GAO - General Accounting Office
  IT - information technology
  OMB - Office of Management and Budget
  ROI - return on the investment

PREFACE
============================================================ Chapter 0

Federal government spending on major physical capital investments is
projected to total over $68 billion in fiscal year 1999.  While
federal agencies historically make large numbers of capital
acquisitions annually, past management problems and years of budget
restraint have led to an increased focus on strengthening capital
decision-making and management.  To enhance the effectiveness of
federal investments in capital assets, the Office of Management and
Budget (OMB) and the General Accounting Office (GAO) have been
working to promote improvements in decision-making practices to
ensure that the purchase of new assets and infrastructure will have
the highest and most efficient returns to the taxpayer and to the
government and that existing assets will be adequately repaired and
maintained.

OMB recently developed the Capital Programming Guide--a supplement to
OMB Circular A-11--which provides detailed guidance to federal
agencies on planning, budgeting, acquisition, and management of
capital assets.  This guidance ranges from information on linking
capital decisions to strategic goals and objectives, to analyzing and
ranking potential investments, to making informed decisions based on
the full cost and risk of a project.

GAO participated in the development of the Capital Programming Guide
and conducted extensive research to identify leading practices in
capital decision-making used by state and local governments and
private sector organizations.  GAO has provided OMB with examples for
inclusion in the second version of the Capital Programming Guide and
has produced this executive guide based on these leading practice
examples.  This executive guide summarizes 12 fundamental practices
that have been successfully implemented by organizations recognized
for their outstanding capital decision-making practices.  It also
provides examples of leading practices from which the federal
government may be able to draw lessons and ideas.

In 1994-95, GAO also worked with OMB to produce guidance on
evaluating information technology (IT) investments,\1 which are a
form of capital asset.  GAO produced a leading practices guide\2 in
that instance as well and subsequently produced additional guidance
on IT investments.\3 The guidance provided in the OMB Capital
Programming Guide and in this GAO leading practices executive guide
applies to all forms of capital investment, including IT investments,
and should be used in conjunction with other GAO and OMB IT guidance.
We would like to thank the Private Sector Council and the leading
practice organizations we selected for our study, which are listed on
page 16, for providing us with information about their practices and
assisting us in producing this executive guide.

This guide was prepared under the direction of Paul Posner, Director,
Budget Issues.  If you have questions or comments, please contact him
at (202) 512-9573 or his Assistant Director, Christine Bonham, at
(202) 512-9576.  Other major contributors are listed in appendix I.
You may submit comments before June 29, 1998, by phone, email, or
regular mail to Christine Bonham at the following:

Phone:  (202) 512-9576

Email:  [email protected]

Mail:  Christine Bonham
U.S.  General Accounting Office
Room 4062
441 G Street, NW
Washington, D.C.  20548

Gene L.  Dodaro
Assistant Comptroller General
Accounting and Information Management Division

--------------------
\1 Evaluating Information Technology Investments:  A Practical Guide,
Office of Information and Regulatory Affairs, Information Policy and
Technology Branch, Office of Management and Budget, November 1995.

\2 Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994).

\3 Information Technology Investment:  Agencies Can Improve
Performance, Reduce Costs, and Minimize Risks (GAO/AIMD-96-64,
September 30, 1996).

Assessing Risks and Returns:  A Guide for Evaluating Federal
Agencies' IT Investment Decision-making (GAO/AIMD-10.1.13, Version 1,
February 1997).

Executive Guide:  Measuring Performance and Demonstrating Results of
Information Technology Investments (GAO/AIMD-98-89, March 1998).

INTRODUCTION
============================================================ Chapter 1

The Congress, the Office of Management and Budget, and GAO have
identified the need to improve federal decision-making regarding
capital acquisition and management.  GAO's past work has identified a
variety of federal capital projects where acquisitions have yielded
poor results--costing more than anticipated, falling behind schedule,
and failing to fully meet mission needs and goals.  The Congress has
expressed concern regarding the management of information technology
projects, the federal acquisition process, and the collection of
information pertaining to deferred maintenance.\1 OMB also has noted
a lack of a clear sense of mission for many programs, insufficient
consideration of life-cycle costs, and failure to analyze and manage
the risk inherent in capital asset acquisitions.  Recent OMB guidance
is attempting to fill these gaps, but guidance on project analysis,
selection, tracking and evaluation historically has not been provided
on a governmentwide basis, and agencies have not always developed
overall goals and strategies for implementing capital investment
decisions.  Nor has the federal government generally planned or
budgeted for capital assets over the long term.

In fiscal year 1997 alone, the federal government spent a reported
$72.2 billion, which was equal to 4.5 percent of total outlays, on
direct major physical capital investment (this does not include
grants to state and local governments for highways, environment and
other infrastructure projects).  Of this, the largest portion, a
reported $52.4 billion, was spent on defense-related capital assets,
while a reported $19.7 billion was spent for nondefense capital
assets.  Direct physical investment for nondefense assets includes
outlays for water, power, and natural resource projects, construction
and rehabilitation of Postal Service facilities and veterans
hospitals, major equipment, facilities for space and science
programs, the air traffic control system, and information technology.
In fiscal year 1998, the President's budget estimates that spending
for direct physical capital investments will decrease to $64.1
billion, and in fiscal year 1999 it will increase slightly to about
$68.6 billion.  With federal agencies facing increasing demands to
improve performance, and with continuing tight budgets, the
importance of making the most effective capital acquisition choices,
of implementing those choices well, and of maintaining these
acquisitions over the long term will intensify.  While capital
decision-making involves the leadership of the executive branch and
the Congress who must weigh a range of options as competing
priorities, federal agencies have an essential role to play in
managing the capital decision-making process and ensuring that
informed choices are made.

A number of laws enacted in this decade are beginning to propel
agencies toward improving their capital decision-making practices.
The Congress enacted the Federal Acquisition Streamlining Act of 1994
(FASA) to improve the federal acquisition process.  Title V of FASA
was designed to foster the development of (1) measurable cost,
schedule, and performance goals and (2) incentives for acquisition
personnel to reach these goals.  Civilian and Department of Defense
agencies are required to report annually on whether major and
nonmajor programs are achieving 90 percent of program goals and must
identify suitable action if goals are not being met.  The Congress
enacted the Clinger-Cohen Act in 1996 to improve the implementation
and management of information technology projects.  The Clinger-Cohen
Act encourages the use of performance-based and results-based
management for information systems.  The Government Performance and
Results Act of 1993 (the Results Act) requires agencies to develop
mission statements, long-range strategic goals and objectives, and
annual performance plans.  It also emphasizes identifying and
measuring outcomes, including benefits.  To help agencies integrate
and implement these various requirements, OMB has added a new section
to its annual budget preparation guidance (Circular A-11), requiring
agencies to provide information about their major capital
acquisitions and to submit a "capital asset plan and justification."
This guidance is supplemented by OMB's new Capital Programming Guide,
which provides detailed steps on planning, budgeting, acquiring, and
managing capital assets.  Circular A-11 also includes guidance to
agencies on linking annual performance plans to capital planning
efforts.

In its Capital Programming Guide, OMB encourages federal agencies to
develop long-term "agency capital plans" as part of their capital
planning process and to use these plans to develop a summary for
their budget justifications, for congressional authorizations, and
for justifications for appropriations to the Congress.  Agencies will
give greater attention to the quality of these plans if they view
them as being important to decisionmakers.  If oversight and
appropriation committees use an agency capital plan when reviewing
requests for capital, these committees will then have the opportunity
to assess whether agencies are incorporating the requirements
mentioned above into their capital planning process.

This executive guide identifies organizational attributes that are
important to the capital decision-making process as a whole, as well
as capital decision-making principles and practices used by
outstanding state and local governments and private sector
organizations.  Figure 1 illustrates how these attributes and
principles fit together.  The executive guide also includes
information from one federal agency, which helped us in considering
the applicability of our findings to the federal government
experience.  Although this executive guide focuses on fundamental
practices rather than detailed guidance, the examples illustrate and
complement many of the phases and specific steps contained in the OMB
Capital Programming Guide.

   Figure 1:  The Capital
   Decision-Making Framework

   (See figure in printed
   edition.)

Based on our interviews with leading organizations, we found that the
principles and related practice areas are most effective when
reinforced by four important success factors.  These factors are
vision, strategic planning, the availability of good information, and
communication.

--------------------
\1 The Statement of Federal Financial Accounting Standards No.  6
defines deferred maintenance as "maintenance that was not performed
when it should have been or was scheduled to be and which, therefore,
is put off or delayed for a future period."

      VISION
-------------------------------------------------------- Chapter 1:0.1

Vision and leadership are crucial to the success of leading
organizations--not only for capital planning and decision-making, but
for all aspects of the organization's activities.  Leaders define the
mission of the organization and identify new directions, strategies,
and priorities.  In leading organizations--including state
governments--chief executives set goals and priorities for the
organization or state as a whole based on the mission they have
defined for the organization.  They then determine which areas, and
in some cases, which specific projects, should receive increased
emphasis and funding, and which areas should remain stable or receive
reduced emphasis.  Sub-units within the organization know why they
have been allocated a certain level of funding and where their unit
fits within the overall plan for the organization.

Setting goals and priorities for the organization as a whole is an
essential first step in developing the long-range strategy for the
organization.  Top-level officials in the private sector determine
which areas of the organization will be targeted for growth and where
they may expect to receive increased returns.  In the public sector,
the state governor or legislature, or agency head, determines which
areas should be targeted for re-engineering and expected savings.
Greater resources will then be devoted to these targeted areas, while
other areas of the organization understand that they are not one of
these priority areas.  Units within the organization or individual
state agencies then develop their strategic plans accordingly.

In the federal arena, it is the President and the Congress who
articulate the goals and priorities for the country as a whole,
reflecting the views of the citizens who elected them.  The
President's Budget reflects the President's priorities and view of
the nation.  In contrast to the hierarchy of the executive branch,
the Congress is a group of peers representing diverse interests and
concerns; and its spending and revenue decisions incorporate the
priorities and vision of the 535 congressional members.
Appropriations and other spending laws, which are passed by the
Congress and signed by the President, reflect the agreements within
the Congress and between the two branches of government and represent
the goals and priorities of the government as a whole.  These goals
and priorities are the starting point for the planning process and
agencies should ensure that selected projects will meet these goals
and produce expected benefits.

      STRATEGIC PLANNING
-------------------------------------------------------- Chapter 1:0.2

In successful organizations, it is strategic planning that guides the
decision-making process for all spending.  Strategic planning can be
defined as a structured process through which an organization
translates a vision and makes fundamental decisions that shape and
guide what the organization is and what it does.  Leading
organizations also use their strategic planning process to assess the
needs of their clients and constituents, and to assess the political
and economic environment in which they are operating.  A strategic
plan defines an organization's general goals and objectives, while an
annual performance plan describes in greater detail the specific
processes, technologies, and types of resources, including capital,
that are needed to achieve the performance goals.  Leading
organizations use their strategic planning process to link the
expected outcomes of projects, including capital projects, to the
organization's overall strategic goals and objectives.

In the federal arena, the Results Act focuses on the results of
activities as opposed to the activities themselves and requires
federal agencies to establish strategic plans that include the
following elements:  (1) a mission statement, (2) agencywide goals
and objectives, (3) a description of how the goals are to be
achieved, (4) a description of the relationship between long-term
goals and objectives and annual performance goals, (5) an
identification of key factors external to the agency that could
significantly affect the achievement of its goals and objectives, and
(6) a description of the program evaluations used to establish or
revise agency goals and objectives.  The Results Act provides the
underpinnings for agencies to develop comprehensive and effective
plans for all activities, including capital investments.  It can also
facilitate communication within the agency itself as well as between
the agency and its external clients.

      GOOD INFORMATION AND DATA
      SYSTEMS
-------------------------------------------------------- Chapter 1:0.3

Officials at leading entities stated that good data and information
systems in addition to effective information control systems are
essential to supporting sound capital planning and decision-making.
To make informed capital resource allocation decisions, information
and feedback on asset performance, condition, cost of programs, and
operations are critical.

Leading organizations maintain asset and facility inventory systems
that include the current condition of existing capital assets.  The
asset condition information is used to calculate deferred maintenance
needs and costs and in making decisions about the allocation of
maintenance and repair funds to agencies.  Information about existing
assets is also used in determining what capital resources are
currently available and what resources are needed in order for the
organization to be able to meet its goals and objectives.  The data
and information provided by well planned information systems give
organizations the ability to build comprehensive measures, collect
relevant data, and perform analyses which can be used to support
strategic as well as operational budgeting decisions.

      COMMUNICATION
-------------------------------------------------------- Chapter 1:0.4

In leading organizations, clear communication of an organization's
vision and strategic goals is also a prerequisite for success.  Goals
are unlikely to be achieved unless the entire organization knows and
understands what they are.  In leading organizations, the vision and
goals of top-level officials are communicated down to all levels of
the organization and communication from lower levels feeds back up to
top management.  Individuals involved in the capital decision-making
process know what outcomes and results are expected of them and thus
projects are selected, designed, and implemented to contribute to the
achievement of the organization's strategic goals.  For example,
top-level officials develop the organization's priorities and
financial targets based on the leadership's vision and communicate
them downward to sub-units within the organization.  Based on these
goals and targets, managers at all levels work to produce plans and
capital initiatives that outline their individual strategies for
achieving top-level goals.  These managers know the priorities of the
organization and how their units are expected to contribute to the
organization's success.  Organizationwide measures are also
translated to sub-units within the organization and are ultimately
used to measure the performance of individual projects and employees.

From these critical success factors, we distilled five general
principles that leading organizations used to make capital investment
decisions.  These principles are (1) integrate organizational goals
into the capital decision-making process, (2) evaluate and select
capital assets using an investment approach, (3) balance budgetary
control and managerial flexibility when funding capital projects, (4)
use project management techniques to optimize project success, and
(5) evaluate results and incorporate lessons learned into the
decision-making process.  To provide more concrete examples of how
agencies and the Congress can apply these principles, we identified
practices used by the leading organizations which best demonstrate
each principle.

OBJECTIVES, SCOPE, AND METHODOLOGY
============================================================ Chapter 2

The objectives of our research were to (1) identify which government
and industry organizations are recognized for their outstanding
capital decision-making practices and (2) identify and describe
leading capital decision-making practices that have been implemented
by these organizations.

In order to identify organizations that might exhibit leading
practices in capital decision-making, we asked experts in the fields
of capital planning and decision-making to help us identify which
government and industry organizations are recognized for their
outstanding capital decision-making practices.  Our contacts included
the Private Sector Council, the Consortium for Advanced Manufacturing
International, the Financial Executives Institute, the Institute of
Management Accountants, the National Association of State Budget
Officers, the Government Finance Officers Association, the National
Governors Association, and academic experts.  We researched
literature, including textbooks, professional journals, academic
articles, and financial reports to obtain information on
organizations suggested by these experts.  We also used Financial
World's "State of the States 1995" and "The State of the Cities:
1995" reports to help us in our selection of leading state and local
government capital decision-making practices.

Based on our literature searches and discussions with experts, we
developed criteria for the actual selection of leading organizations.
Criteria included recognition by experts and academics as being
leading organizations in the field; receipt of awards for capital
planning or for elements of quality; referenced as outstanding in
multiple sources of information; and superior financial performance.
Based on these criteria, we selected the following organizations:

State of Maryland
State of Minnesota
State of Missouri
State of Virginia
State of Washington
Dayton, Ohio
Montgomery County, Maryland
Phoenix, Arizona
Ford Motor Company
General Electric
Mobil Corporation
Texas Instruments

We also selected one federal agency, the U.S.  Coast Guard, with
which to discuss the applicability of the examples identified at
private, state, and local organizations to the federal government's
capital decision-making experiences.  We selected the Coast Guard
because it makes relatively large amounts of capital purchases on a
recurring basis and because of on-going and recent GAO work
pertaining to the Coast Guard's budgeting and capital acquisitions
processes on which we could build.  Coast Guard personnel volunteered
their time and effort to assist GAO with this project.

We developed a series of interview questions pertaining to planning,
budgeting, acquisition, management, and evaluation of capital.
Representatives of the Mead and Xerox Corporations, in their capacity
as Private Sector Council members, reviewed our methodology, case
study selections and initial findings.  They also provided us
information on their capital decision-making practices.

We conducted site visits at each of the leading organizations during
which we interviewed senior officials about the organization's
capital decision-making practices.  In the organizations we studied,
capital assets included buildings, equipment, land, roads, bridges,
and in some cases, information technology.  Many entities consider IT
to be an operating expense and thus do not consider it in their
capital decision-making process.  We relied on the organizations to
describe their processes to us.  We did not verify the accuracy of
their statements, but, wherever possible, we obtained documentation
describing the processes and results.  The documentation we obtained
was consistent with the statements made by each of the organizations.

Based on the interviews and documentation obtained from our site
visits, we compared practices across the organizations and identified
innovative practices used by individual organizations as well as
approaches and elements that were common across organizations.  The
leading organizations in our study have reviewed a draft of this
guide and have verified that the case study examples are an accurate
representation of their practices.

Members of the U.S.  Coast Guard and the Private Sector Council have
each reviewed two drafts of this document.  Officials at the Office
of Management and Budget as well as a representative of a leading
academic organization have also reviewed this guide and we have
incorporated their comments as appropriate.

SUMMARY OF PRINCIPLES AND
PRACTICES
============================================================ Chapter 3

This guide is composed of five principles divided into 12 practices,
as illustrated in figure 2.  Each of the principles and practices is
discussed in the following sections.

   Figure 2:  Key Principles and
   Practices

   (See figure in printed
   edition.)

PRINCIPLES AND PRACTICES

      PRINCIPLE I:  INTEGRATE
      ORGANIZATIONAL GOALS INTO
      THE CAPITAL DECISION-MAKING
      PROCESS
-------------------------------------------------------- Chapter 3:0.1

Leading organizations begin their capital decision-making process by
defining their overall mission in comprehensive terms and by
articulating results-oriented goals and objectives.  These
organizations consider a range of possible ways to achieve desired
goals and objectives--examining both capital and noncapital
alternatives.

Practice 1:  Conduct Comprehensive Assessment of Needs to Meet
Results-Oriented Goals and Objectives

A comprehensive needs assessment examines an organization's overall
mission and identifies the resources needed to fulfill its immediate
requirements and its anticipated future needs based on the
results-oriented goals and objectives that flow from the
organization's mission.

Practice 2:  Identify Current Capabilities, Including the Use of an
Inventory of Assets and Their Condition, and Determine If There Is a
Gap Between Current and Needed Capabilities

Leading organizations gather and track information that helps them
identify current capabilities and any gap between what they have and
what they need to fulfill their goals and objectives.  This requires
current and accurate information on the performance and use of
existing assets and facilities.  It also enables them to track
deferred maintenance needs and costs.

Practice 3:  Decide How Best to Meet the Gap by Identifying and
Evaluating Alternative Approaches (Including Noncapital Approaches)

Leading organizations consider a wide range of alternatives to
satisfy their needs, including noncapital alternatives such as
contracting out the service or engaging in a joint-venture project
with another organization, when deciding whether to purchase or
construct a capital asset or facility.  Managers also consider
repair, renovation, and consolidation of existing assets.

      PRINCIPLE II:  EVALUATE AND
      SELECT CAPITAL ASSETS USING
      AN INVESTMENT APPROACH
-------------------------------------------------------- Chapter 3:0.2

An investment approach builds on an organization's assessment of
where it should invest its resources for the greatest benefit over
the long term.  Leading organizations use various decision-making
practices and techniques to make comparisons and trade-offs between
competing projects as well as to assess the strategic fit of the
investment with the organization's overall goals.  This approach is
used to select projects that will provide the greatest overall
benefits and results to the organization for the least cost.

Practice 4:  Establish Review and Approval Framework

Establishing a decision-making framework which encourages the
appropriate levels of management review and approval, supported by
the proper financial, technical, and risk analyses is a critical
factor in making sound capital investment decisions.  A well
thought-out review and approval framework helps managers to make more
effective capital investment decisions supported by better
information.

Practice 5:  Rank and Select Projects Based on Established Criteria

Leading organizations have defined processes for ranking, selecting
and approving projects.  In some organizations, project selection is
based on criteria such as increased cost savings, market growth, and
a relative ranking of investment proposals.  Leading organizations
determine the right mix of projects by viewing all new investments
and existing capital assets as a portfolio.

Practice 6:  Develop a Long-term Capital Plan That Defines Capital
Asset Decisions

Leading organizations we studied also develop long-term capital
plans.  These capital plans often cover a 5 or 10-year period and are
updated either annually or biennially.  The process of developing
such plans requires them to establish priorities for capital project
implementation over the long term.  The plan itself assists with
developing current and future budgets, including detailed cost
estimates of individual projects.

      PRINCIPLE III:  BALANCE
      BUDGETARY CONTROL AND
      MANAGERIAL FLEXIBILITY WHEN
      FUNDING CAPITAL PROJECTS
-------------------------------------------------------- Chapter 3:0.3

Officials at leading organizations in our guide agreed good budgeting
requires that the full costs of a project be considered when making
decisions to provide resources.  At the federal level, this calls for
a balance between congressional budgetary control and agency
flexibility in financing capital acquisitions.  Most of the
organizations in our guide make a commitment to the full cost of a
capital project up front and have developed their own alternative
methods for maintaining budgetary control while allowing flexibility
in funding.

Practice 7:  Budget for Projects in Useful Segments

Many of the organizations in our guide make a commitment to the full
cost of a capital project up front.  One strategy that has proven
useful to federal agencies as well as to the organizations in our
guide in dealing with the problems posed by full funding is to budget
for projects in useful or stand- alone segments.  This means that,
when a decision has been made to undertake a specific capital
project, funding sufficient to complete a useful, and stand-alone
segment of the project is provided in advance.

Practice 8:  Consider Innovative Approaches to Full Up-Front Funding

Alternative strategies successfully used by federal agencies and some
leading organizations to accommodate full funding of capital projects
in a constrained budget environment include the use of "savings
accounts," which allow managers who comply with specified
requirements to set aside and save annual appropriations for future
purchases of expensive equipment, contracting out for capital
intensive services, and developing public/private partnerships.
These strategies enhance an organization's flexibility to finance the
full costs of capital projects without compromising top management's
(or, in the federal arena, the Congress's) ability to make decisions
based on full costs.

      PRINCIPLE IV:  USE PROJECT
      MANAGEMENT TECHNIQUES TO
      OPTIMIZE PROJECT SUCCESS
-------------------------------------------------------- Chapter 3:0.4

Many entities apply a variety of project management techniques to
optimize project success and enhance the likelihood of meeting
project-specific as well as organizationwide goals.  These techniques
include monitoring project performance, establishing incentives to
meet project goals, and developing a project management team with the
right people and the right skills.  It is also important to link
capital projects and their expected outcomes to strategic goals and
objectives.

Practice 9:  Monitor Project Performance and Establish Incentives for
Accountability

Leading organizations determine successful implementation of a
capital investment project by whether or not the project was
completed on schedule, came in within budget, and performed as
intended.  In order to increase the likelihood that a project will be
successfully completed, it is not only necessary to monitor project
performance against cost, schedule, and technical performance goals,
but also to establish incentives to meet goals and to identify and
control circumstances that would result in breaching those goals.

Practice 10:  Use Cross-Functional Teams to Plan for and Manage
Projects

Leading organizations use cross-functional teams, led by a project
manager, to plan and manage projects.  Typically a core project team
is established early in the life cycle of a project and additional
individuals with particular technical or operational expertise are
incorporated during appropriate phases of the project.  This
integrated and comprehensive approach improves communication among
the various stakeholders in the project and increases the likelihood
that potential problems will be identified and resolved quickly, thus
increasing the likelihood that the project will remain on schedule
and within budget.

      PRINCIPLE V:  EVALUATE
      RESULTS AND INCORPORATE
      LESSONS LEARNED INTO THE
      DECISION-MAKING PROCESS
-------------------------------------------------------- Chapter 3:0.5

Leading organizations have a common trait--a desire to assess and
improve their performance.  Some of the organizations in our guide
have implemented systematic procedures for evaluating specific
project results, while others have taken a broader approach and
reevaluated their capital decision-making processes as a whole.

Practice 11:  Evaluate Results to Determine If Organizationwide Goals
Have Been Met

One way leading organizations evaluate project performance is to
measure the extent to which project outcomes have contributed towards
goals and objectives that were established when the project was
approved.  This type of evaluation can be incorporated into an
organization's capital decision-making process through a performance
measurement system or through postcompletion audits.  Postcompletion
audits can go beyond determining if a capital asset has met its
technical specifications, looking also at whether the project met the
goals it said it would meet.

Practice 12:  Evaluate the Decision-Making Process:  Reappraise and
Update to Ensure That Goals Are Met

Some entities choose to review the capital decision-making process
itself, which often results in major revisions to these processes.
These organizations are willing to take a critical look at themselves
and how decisions are being made and are open to making what, in some
instances, are significant structural and cultural changes.

COMMON ELEMENTS WITH OMB'S CAPITAL
PROGRAMMING GUIDE

Both the OMB Capital Programming Guide and this executive guide
stress the importance of linking resource requests to
results-oriented capital strategies that are rooted in sound and
thorough up-front planning.  Both guides include the following
concepts:

  -- determining the gap between the capacity of current assets and
     planned results;

  -- evaluating alternative approaches to achieving results;

  -- assessing investments as a portfolio;

  -- using executive review committees to make selections;

  -- developing measurable goals and performance measures;

  -- forming integrated project teams;

  -- funding in useful segments;

  -- tracking project cost, schedule, and performance;

  -- developing a long-term capital plan; and

  -- conducting post-implementation reviews.

The examples provided in the GAO executive guide can be used to
illustrate these concepts as they are discussed in the OMB Capital
Programming Guide.

INTEGRATE ORGANIZATIONAL GOALS
INTO THE CAPITAL DECISION-MAKING
PROCESS
============================================================ Chapter I

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

Leading organizations begin their capital decision-making process by
defining their overall mission in comprehensive terms and
results-oriented goals and objectives.  This enables managers to
identify the resources needed to satisfy the organization's program
requirements--requirements based on its goals and objectives.  In
order to do this, an organization must have identified its mission
and goals through a strategic planning process.  To assist with
identifying any gap between an organization's resource needs and its
existing capital capabilities, leading organizations maintain systems
that capture and report information on their existing assets and
facilities.  This information is frequently updated and accessible to
decisionmakers when needed.  Leading organizations also consider a
full range of possible ways to achieve their goals and objectives,
including by examining both capital and noncapital alternatives.

      PRACTICE 1:  CONDUCT
      COMPREHENSIVE ASSESSMENT OF
      NEEDS TO MEET MISSION AND
      RESULTS-ORIENTED GOALS AND
      OBJECTIVES
-------------------------------------------------------- Chapter I:0.1

Conducting a comprehensive needs assessment or analysis of program
requirements is an important first step in an organization's capital
decision-making process.  A comprehensive needs assessment considers
an organization's overall mission and identifies the resources needed
to fulfill both immediate requirements and anticipated future needs
based on the results-oriented goals and objectives that flow from the
organization's mission.

Many leading organizations we studied conduct a comprehensive needs
assessment to identify and document needed resources.  This process
is variously referred to as needs determination, needs study, or
mission analysis and is often the first step in an organization's
capital planning and budgeting process.  To begin the needs
assessment process, leading organizations assess the extent to which
their stated goals and objectives are aligned with their
organization's mission.  Results-oriented goals and objectives
outline how the organization intends to fulfill its mission.  The
goals describe, in general terms, the organization's policy intent
and define its direction, while objectives serve to move the
organization from broad general goals to specific, quantifiable
results and time-based statements of what the organization expects to
accomplish.  The needs assessment is results-oriented in that it
determines what is needed to obtain specific outcomes rather than
what is needed to maintain or expand existing capital stock.  The
focus placed on results drives the selection of alternative ways to
fulfill a program's requirements.

When conducting a needs assessment, leading organizations assess
their internal and external environments.  They examine the
organization's primary role and purpose, its organizational
structure, its inherent characteristics including strengths and
weaknesses, and its current activities and how they are accomplished.
They also examine external factors that affect or influence the
organization's operations, such as existing and potential future
mandates and the expectations of its customer groups.  Leading
organizations also define the period of time a needs assessment
should cover and how often it is updated.  In leading organizations
we studied, assessments usually cover a 5- or 6-year period into the
future and are updated frequently as part of the organization's
budget cycle.  Some organizations establish dedicated management
teams to conduct the needs assessment.

The federal agency we studied, the U.S.  Coast Guard, goes through an
analogous process.  It conducts a comprehensive needs assessment
through what it calls its mission analysis process.  Mission analysis
is the starting point for determining the resources needed to fulfill
the agency's mission and satisfy its requirements.  This agency is
very capital intensive and, according to agency officials, many of
its cornerstone assets purchased in the 1960s and 1970s are
deteriorating and need replacement.  Until recently, agency managers
mostly replaced existing assets on a one-for-one basis without
looking at alternatives.  Budget pressures and recent requirements to
improve performance have driven the agency to make significant
changes in its capital planning process.  This process, which the
agency describes as "requirements driven," is similar to that
described by other leading organizations we studied.  Agency managers
now look at the agency's mission and its goals, analyze the gaps
between its needs and what currently exists, and consider alternative
ways to fill these gaps.  Agency officials say that mission analysis
is an ongoing process that validates existing inventory and aids in
analyzing options to satisfy capital needs, such as modifying an
existing asset.  Mission analysis is based on broad functional
capabilities.  For example, some of the functions which the agency
must be capable of performing are search and rescue activities 100 to
200 miles offshore, transporting persons, and communicating
efficiently among all of its operational units.  These broad
functions drive the mission analysis rather than analyses of each
individual program's or facility's needs.  Although the mission
analysis process has not been completed for all of the agency's
functions, the agency has determined that it can reduce the number of
assets needed to support one of its critical functions.  As a result
of mission analysis, technological changes, and other recent changes
to its capital planning process, the agency was able to reduce the
number of buoy cutters from 37 to 30 and thus reduce costs.  Upon
completion of the mission analysis process, a mission analysis report
and mission needs statement is prepared.  The approved mission needs
statement must support the need for a project before the project can
go on to the acquisition phase.

As described in the following case study, one state government in our
study conducts a comprehensive issues and needs assessment as part of
its performance budgeting process.  The most recent assessment began
with an examination of the state's core mission and internal and
external factors affecting the state's operations.  The assessment
resulted in the identification of 99 programs and activities that
could be privatized, reorganized, or in some cases, eliminated.

   (See figure in printed
   edition.)

   Figure I.1:  Issues and Needs
   Assessment

   (See figure in printed
   edition.)

         PRACTICE 2:  IDENTIFY
         CURRENT CAPABILITIES,
         INCLUDING THE USE OF AN
         INVENTORY OF ASSETS AND
         THEIR CONDITION, AND
         DETERMINE IF THERE IS A
         GAP BETWEEN CURRENT AND
         NEEDED CAPABILITIES
------------------------------------------------------ Chapter I:0.1.1

Leading organizations gather and track information that helps them
identify the gap between what they have and what they need to fulfill
their goals and objectives.  To help assess current capabilities and
establish a baseline, such organizations maintain systems that track
the use and performance of existing assets and facilities.  This is
an area where current and accurate information is essential.  Some
functions performed by asset inventory and tracking systems include
(1) identifying asset and facility location and status, (2) tracking
and reporting asset and facility condition and deferred maintenance
needs, and (3) tracking user satisfaction.  Federal agencies are now
required to report information on the deferred maintenance of federal
assets.  A critical step in making deferred maintenance estimates is
a complete and reliable inventory of capital assets on which to
assess maintenance needs.

The organizations we studied use a variety of automated systems that
provide decisionmakers with information needed to assess the
availability and condition of their assets and facilities.  Asset and
facility inventory systems are maintained and frequently updated to
provide managers with timely, current, and useful information with
which they can determine the status of assets under their control.
Some organizations maintain inventory systems that also capture data
used to track asset and facility maintenance needs, while other
organizations maintain separate automated systems for this purpose.
For example, one state government we studied maintains an inventory
system that includes not only the list of capital assets but also
their current condition.  Asset condition information from this
database is used in making decisions about the allocation of
maintenance and repair funds to agencies.  In contrast, a local
government we studied maintains both an inventory system and a
separate database of deferred maintenance needs.  The different
approaches used by these governments have both proven to be effective
in providing the necessary information to decisionmakers.

Routinely assessing the condition of their assets and facilities
allows managers and other decisionmakers to evaluate the capabilities
of current assets, plan for future asset replacements, and calculate
the cost of deferred maintenance.  Leading organizations evaluate the
performance of assets and facilities as well as the physical
condition of assets.  One state government we studied maintains a
computerized inventory of state buildings and requires agencies to
complete a structured audit survey--assessing both the physical
condition of state buildings and the physical condition and
performance of the assets within the building.  The survey data are
used to determine whether existing facilities can be modified to
satisfy capital requests.  This state also uses survey data to
calculate its unfunded deferred maintenance and "deferred renewal"
costs.  With such costs conservatively estimated at $1.5 billion, the
state recently implemented a new program to manage these costs and
has designated a specific budget account to accumulate and disburse
funds earmarked to reduce what the state considers to be an unfunded
liability.  Another state government we studied has created a
maintenance reserve fund to finance and increase management attention
to its maintenance needs.  Voters in this state passed a
constitutional amendment to ensure that adequate funds are set aside
for maintenance, repair, and renovation of state facilities.

Leading organizations also stress the importance of using qualified
personnel who possess a strong working knowledge of the asset or
facility to perform asset condition assessments.  For example, one
state government we studied recommends that agencies use a building's
facility manager, plant engineer, or maintenance personnel to assess
the building's condition.  Officials believe that facility condition
information obtained from persons most familiar with the facility is
more accurate and complete.  In addition, facility managers are able
to provide a more detailed history of the facility and its
components.

By comparing the organization's resource needs information with data
on current asset capabilities, leading organizations identify the gap
between what is needed to fulfill their objectives and what resources
are currently available.

   (See figure in printed
   edition.)

         PRACTICE 3:  DECIDE HOW
         BEST TO MEET THE GAP BY
         IDENTIFYING AND
         EVALUATING ALTERNATIVE
         APPROACHES (INCLUDING
         NONCAPITAL APPROACHES)
------------------------------------------------------ Chapter I:0.1.2

Leading organizations consider a wide range of alternatives to
satisfy their needs, including noncapital alternatives, before
choosing to purchase or construct a capital asset or facility.
Managers carefully consider options such as contracting out or
divesting the activity the asset would support.  When it is
determined that capital is needed, managers also consider repair and
renovation of existing assets.  When evaluating alternatives, prudent
decisionmakers also consider the various funding options available to
them.  They weigh the different impacts of debt financing, engaging
in joint-venture projects, or using current-year appropriations.
Under principle III, we discuss some innovative funding approaches
used by leading organizations.

Organizations we studied examine their needs and seriously consider
whether capital is needed to fulfill their requirements.  They look
at two primary issues in trying to evaluate the options available to
them:  (1) whether or not the function is essential to fulfilling the
organization's core responsibilities and (2) whether or not the
organization has the specific expertise to perform the function well
and cost-effectively.  Managers and decisionmakers in successful
organizations consider alternatives such as leasing, privatizing the
activity, or engaging in joint-venture projects with other
organizations to minimize the amount invested and reduce their risk.
For example, two private sector companies we studied do a
considerable amount of outsourcing.  One company is also a partner in
many joint-venture projects.  As a result of its evaluation of
available options, one state government we studied recently
identified numerous programs for privatization resulting in
significant estimated budgetary savings.

If they decide that a capital asset is needed to fulfill an
organization's requirements, leading organizations we studied first
consider the use of existing assets before deciding to purchase or
construct new assets.  Using information from an organization's
inventory and deferred maintenance systems helps with deciding
whether existing assets are capable of fulfilling a need.  One local
organization looks at many alternatives, such as new construction or
leasing to fulfill its needs, although renovating or expanding an
existing facility is the option used most.

   (See figure in printed
   edition.)

EVALUATE AND SELECT CAPITAL ASSETS
USING AN INVESTMENT APPROACH
=========================================================== Chapter II

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

An investment approach builds on an organization's assessment of
where it should invest its resources for the greatest benefit over
the long-term.  When making choices between alternative capital
investments, leading private organizations focus on investment
methods, such as payback or net present value, which draw attention
to cash flows associated with potential investments.  However, they
also assess the strategic fit of the investment with the
organization's overall goals.

Leading public organizations we studied have begun to focus on the
investment's fit with the organization's goals, but they have not
focused as heavily on quantifying the benefits and identifying which
investments provide the most value.  Federal agencies have displayed
similar behavior.  A GAO review\1 of five agencies'\2 Information
Technology (IT) investment processes concluded that none of the five
agencies had implemented a complete, institutionalized investment
approach that would fulfill the requirements of the Clinger Cohen
Act.  The GAO study found that IT investment decision-making at these
five agencies was often inconsistent and cost-benefit and risk
analyses were rarely updated as projects proceeded and were not used
for managing project results.  Also, the mission-related benefits of
implemented systems were often difficult to determine since agencies
rarely collected or compared data on anticipated versus actual costs
and benefits.

We found that leading organizations have decision-making processes in
place to help them assess where they should invest their capital for
the greatest benefit.  In general, when evaluating investments,
organizations address three basic questions:

  -- Does the investment support our goals?

  -- Are we obtaining the greatest benefits for the least cost?

  -- Are our current investments meeting our expectations or should
     we consider alternative investments?

The organizations we studied also develop long-term capital plans
that are based on the long-range vision for the organization embodied
in the strategic plan.  Long-term planning allows an organization to
establish priorities for capital project implementation over the
long-term and assists with developing current and future budgets,
including detailed cost estimates of individual projects.

--------------------
\1 GAO/AIMD-96-64, September 30, 1996.

\2 The National Aeronautic and Space Administration, the Internal
Revenue Service, the National Oceanic and Atmospheric Administration,
the U.S.  Coast Guard, and the Environmental Protection Agency.

         PRACTICE 4:  ESTABLISH
         REVIEW AND APPROVAL
         FRAMEWORK
----------------------------------------------------- Chapter II:0.0.1

We found that establishing a decision-making framework that
encourages the appropriate levels of management review and approval,
supported by the proper financial, technical, and risk analyses, is a
critical factor in making sound capital investment decisions.  A well
thought out review and approval framework can mean capital investment
decisions are made more efficiently and are supported by better
information.  Some leading organizations have review processes in
place that determine the level of analysis and review that will be
conducted based on the size, complexity, and cost of the project.
Projects that are expensive, span a number of years, or are crucial
to the organization's strategy or structure usually require more
analysis, support, and review than projects that cost less, have
shorter time frames, or have less organizationwide impact.

We found that all organizations do not review projects in the same
manner.  One large multinational company we studied has various
levels of review that are based on the business and economic
significance of proposed projects.  This company has a Corporate
Executive Council (CEC), which meets quarterly to make short- and
long-term strategy decisions.  These decisions in turn drive the
CEC's allocation of varying amounts of capital to its business
groups.  After the capital is allocated to the groups, capital
funding decisions are made at various levels within the groups
depending on the cost and type of project being proposed.  In
general, the CEO does not involve himself directly in the capital
investment decisions of its business groups; it is, however, directly
involved when projects are of strategic significance to the company
as a whole or are very large and capital intensive.

This organization categorizes projects as "mandatory," "necessary" or
"would like to do." Mandatory projects require less up-front analysis
and management review because the company is usually required to make
the investment by law, often because of a regulatory mandate.
Necessary projects are usually more strategic in nature and either
involve benefits to the organization or cost savings.  Depending on
the scope of the project and the risk involved, this type of project
would generally require a greater level of analysis and review before
the company would decide to undertake this type of project.  This
would also hold true for would like to do projects, which are
projects that managers would like do but are not necessarily critical
to the organization's goals.

As part of the capital review and approval process, leading
organizations develop a decision or investment package to justify
their capital project requests.  Although different organizations use
different names for these decision packages--such as business case or
project request--they generally include documents and analyses to
support a proposed investment.  The supporting documentation might
include an environmental impact statement for a proposed building
site or a statement of compliance with an endorsed standard
architecture.  Organizations also share some of the following common
categories of information

  -- links to organizational objectives,

  -- solutions to organizational needs,

  -- project resource estimates and schedules, and

  -- project costs, benefits, and risks.

Decision packages provide decisionmakers with a valuable tool for
analysis and planning at the time the investment proposal is
initiated, which is the critical period for managers to be thinking
about issues associated with the investment.  A decision package also
should place the justification and documentation for the investment
in a strategic context, clearly showing how an investment is linked
to strategic goals.  Thus it would help managers to assess critical
factors associated with strategic investment decisions.

Within leading organizations, decision packages generally are
presented to top-level management in a simple, easily understood
format that facilitates management decision-making.  At one
organization we visited, executives review a corporate business
plan--a high-level outlook that integrates information from specific
proposals.  Their focus is more on the organization's overall
strategy than the individual projects.

For example, one multinational corporation we studied has a project
summary form on which a project's description, costs, benefits,
risks, proposed schedules, and measurements are summarized.  This
permits the managers to quickly assess the project's potential.  The
form used by this company has five informational categories:  project
overview, project review schedule/assumptions, resources, benefits,
and measurements.  (See figure II.1.) Project overview provides a
general description of the project and the management team involved.
The project sponsor must also indicate which of five company
priorities the project is attempting to address:  global interests,
growth, productivity, improvement and quality.  Project overview also
has a risk classification that rates projects on business and
technical risk.  The second category, project review and
schedule/assumptions lists all the planned project and technical
reviews for the proposed project by date.  The third category,
resources, projects capital and related expenses by year for five
years.  Similarly, under the benefits category, savings and benefits
from cost avoidance, are projected by year for five years.  The last
category, the measurements category, contains the three major
proposed performance measurements the project sponsor plans to use to
measure the progress and success of the proposed project.

   Figure II.1:  Project
   Assessment Form

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   Figure II.2:  Elements of a
   Decision Package

   (See figure in printed
   edition.)

As part of its capital review and approval analysis, leading
organizations conduct some form of economic or financial analysis.
The types of analyses ranged from a complete benefit/cost
analysis--which includes full life-cycle costing, estimating, and
discounting cash flows, and determining the return on the investment
(ROI) based on a specified discount rate--to an analysis that
compared alternatives and recommended the most cost-effective option.

One large corporation we studied uses a variety of tools and
techniques (e.g., benefit/cost analysis and discounted cash flow
analysis) to support its project business package.  The company uses
outside experts to prepare financial projections for some projects.
Once the analysis is completed and a business package prepared, the
business package is used at all levels of the organization to make
both strategic and tactical decisions.  For example, at the business
unit or tactical level, special emphasis is placed on the project's
financial potential and return.  However, at the top management
level, review of financial information is secondary to the
executive's interest in how the investment fits into the company's
overall strategy.  A high-level official noted that managers need to
"work around the financials" and identify the key things that are
likely to make the project successful.  The official said that, "It
is not the money you spend on an investment that makes it successful,
it is understanding the business well enough to understand what makes
it work and then measuring that."

One leading organization uses an "unbundling" process to assess a
project's value and its return on capital expended.  Unbundling, as
described by a company manager, involves separating a proposed
project into various components and assessing the value and return of
these components.  Different components of the project are assessed
in different combinations to determine which combination of
components provides the highest return with the least amount of
capital invested.  To illustrate, a company manager gave an example
of a proposed project that initially required capital costs of $100
million and had an ROI of $30 million (30 percent).  Through
discussions and brainstorming, managers were able to eliminate
certain project components considered nonessential to the project and
therefore reduced the up-front capital costs from $100 million to $60
million; this resulted in an estimated ROI of $25 million (41
percent).  The manager we interviewed said that "managers need to
look at the project in the aggregate and then unbundle it into
component project parts.  They then need to ask themselves what they
really expect to obtain from the project at the end."

We also found that leading organizations identify and assess project
risks when selecting projects.  One manager stated that all projects
have some degree of risk either because of the project assumptions
and/or because of the environment in which the project is being
undertaken.  In one large multinational company we studied, risk is
one of many factors senior management considers when approving
certain investment proposals.  To deal with risk, this company
requires that project risks be clearly identified, the potential
impact of the risks be assessed, and risk mitigation strategies be
considered.

This company uses a portfolio management technique to rank and make
trade-offs among competing projects.  As illustrated in figure II.3,
new investment opportunities, primarily new venture projects, are
positioned on two different matrices.  Matrix 1 displays market and
competitive advantage, while matrix 2 displays economic benefit and
country risk.  How the investment options are distributed across
these matrices helps managers rank projects and points out weaknesses
and risks in the portfolios and suggests potential trade-offs.  As
illustrated, the two dimensional framework and project rankings allow
managers to make trade offs between defined criteria and risks when
they attempt to select a diverse portfolio of projects.  Investment
decisions regarding programs that fall into either the "top programs"
category or the "discard" category are relatively easy for managers
to make since the program is considered either a clear winner or a
clear loser.  The difficulty arises when, because of limited capital
funds, decisions and trade-offs have to be made among programs
falling into the "work to improve" category.  In such circumstances,
management balances the established criteria and risks with
management judgment and experience.

   Figure II.3:  Example of
   Portfolio Management

   (See figure in printed
   edition.)

A medium-sized organization we studied refines the scope and cost
estimates of its projects at different phases of the project
life-cycle to reduce the risk of cost overruns.  The company uses an
approval process based on different classes of cost estimates, which
requires managers to develop a series of increasingly more accurate
cost estimates.  An initial rough cost estimate, known as a
"class-40" estimate, is developed in order to have the project
included in the company's facility plan.  A class-40 estimate is
defined as an estimate where there is a 95 percent probability that
the actual costs will not exceed the estimate by more than 40
percent.  Once the project is in the facility plan, the next step is
to develop an estimate sufficient to support an actual request for
funding.  This estimate is known as a "class-20" estimate--meaning
there is a 95 percent probability that the actual costs will not
exceed the estimate by more than 20 percent.  Project funding
decisions are made based on the class-20 estimate; however, before
the project construction phase can begin, a "class-10" estimate must
be developed and approved.

         PRACTICE 5:  RANK AND
         SELECT PROJECTS BASED ON
         ESTABLISHED CRITERIA
----------------------------------------------------- Chapter II:0.0.2

Leading organizations also have defined processes for ranking and
selecting projects.  The selection of projects is based on
preestablished criteria and a relative ranking of investment
proposals.  Leading organizations determine the right mix of projects
to invest in by viewing the investments as a portfolio.
Organizations generally find it beneficial to rank projects because
the number of requested projects exceeds available funding.

Several organizations we studied use their strategic objectives as a
basis for establishing decision-making criteria.  These criteria,
such as increased cost savings, and market growth, link to
organizational strategies and are used to rank projects.  In
addition, sound criteria help link potential investments to program
priorities and desired results.  Top-level managers are involved in
developing the decision-making criteria as well as in communicating
the criteria throughout the organization.  At the organization's
highest levels, criteria, such as strategic fit and political
implications, may be used to determine what policy initiatives or
business areas to pursue.  At that level, decisions are directed at
issues, such as how to get the most out of limited resources and how
to allocate those resources across different divisions or businesses.
At lower organizational levels, capital investment decisions
generally require managers to identify alternative strategies which
align with organizational goals and then choose the alternative with
the highest benefit or return.

Once these criteria have been communicated, it is easier for managers
to determine how their particular units fit into the overall
organizational framework.  For example, in one midwestern state,
which uses both a collaborative decision-making process and extensive
communication as part of its budgeting process, the state's Office of
Administration works closely with the executive officials of the
state government's various departments.  These officials also serve
on the governor's cabinet and participate in establishing the
administration's priorities.  As part of the process, the Office of
Administration reviews all projects for technical merit and then
meets with cabinet members to narrow down the list of requested
projects to a manageable funding level.  At the meetings, the Office
of Administration gives an overview of the governor's priorities and
the state's fiscal position.  Each agency head is then given the
opportunity to present his agency's priorities.  The state officials
we interviewed said that the process has been successful beyond
expectation because the meeting generates a high degree of consensus
among cabinet members as to the state's priorities.  Furthermore,
every agency official leaves the meeting knowing the priority of
their projects and why they might not be funded.  As one official
said, "You might not win, but you understand why you lost."

Several organizations we studied, based on their analysis and
established criteria, developed a ranked listing of projects.  They
use these rankings to help make selections among competing projects.
One city we studied uses a ranking technique to choose among
competing projects within and across functional areas.  The city
ranks and makes trade-offs between six different city functional
areas when deciding which capital projects to fund.  As part of this
community's selection process, a citizen advisory board appoints both
citizens and agency officials to six subcommittees.  Each
subcommittee is responsible for establishing criteria and ranking
projects for a specific functional area.  Based on the subcommittees'
rankings, the board votes and selects projects.  The process is
structured so that decisions about which projects will be funded are
made across functional areas.  Choices are made between the highest
ranking project in each function.  The project that receives the most
votes is funded and the second-place project in that function moves
up to be the first-place project in that category; it then competes
in the next round of voting with all the first-place projects in the
other functions.  The board voting continues until all projects have
been ranked.  It is possible that the community's priorities could
result in all projects in a particular function receiving funding
before any projects in other functional areas.  Before this process
was adopted, community capital projects were only ranked and selected
within each functional area; no trade-offs were made across
functions.  The process change was made in response to citizen
dissatisfaction.  The new process has increased citizen satisfaction,
prompted in part by the greater understanding of how and why certain
decisions are made.

   (See figure in printed
   edition.)

   Figure II.4:  Linking Criteria
   to Goals and Objectives

   (See figure in printed
   edition.)

         PRACTICE 6:  DEVELOP A
         LONG-TERM CAPITAL PLAN
         THAT DEFINES CAPITAL
         ASSET DECISIONS
----------------------------------------------------- Chapter II:0.0.3

Once projects are ranked, they are put into a long-term capital plan.
Leading organizations develop long-term capital plans to guide
implementation of organizational goals and objectives and help
decisionmakers establish priorities over the long term.  While the
plans must be responsive to changing requirements, they are based on
the long-range vision for the organization embodied in the strategic
plan.  Therefore, any year-to-year changes should be driven by
strategic decisions.

Leading organizations we studied prepare long-term capital plans to
document specific planned projects, plan for resource use over the
long term, and establish priorities for implementation.  These
capital plans usually cover a 5-, 6-, or 10-year period and are
updated either annually or biennially.  Long-term planning requires
that decisionmakers rank capital needs in priority order and promotes
the making of informed choices about managing the organization's
resources and debt.  Officials in one state told us that requiring
agencies to develop capital plans encourages them to think about the
long term and reduces the number of surprise projects.  Long-term
planning also requires the organization to weigh and balance the need
to maintain existing capital assets against the demand for new
assets.  Some leading organizations prepare long-term asset and
facility maintenance plans that are incorporated into their long-term
capital plans.  This helps decisionmakers determine whether and when
to purchase a new capital asset or to continue to maintain an
existing one.

Developing long-term capital plans also enables organizations to
review and refine a proposed project's scope and cost estimates over
several years, which helps to reduce cost overruns.  While out-year
cost estimates are preliminary, they help provide decisionmakers with
an overall sense of a project's funding needs.  As projects move
closer to the year of implementation, project scope becomes more
clearly refined and cost estimates also can be refined to more
accurately reflect actual project costs.

Most state governments we studied require that all capital project
requests be included in an agency's long-term capital plan.  In
leading private sector companies, planned capital expenditures are
aligned with long-range business plans.  The business plans are
usually based on a product's life cycle, market conditions, or
corporate goals and objectives.

   (See figure in printed
   edition.)

BALANCE BUDGETARY CONTROL AND
MANAGERIAL FLEXIBILITY WHEN
FUNDING CAPITAL PROJECTS
========================================================== Chapter III

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

Officials at leading organizations in our study agree that good
budgeting requires that the full costs of a project be considered
when making decisions to provide resources.  At the federal level,
this calls for a balance between congressional budgetary control and
agency flexibility in financing capital.  From the congressional
perspective, budgetary control is enhanced if budget authority for
the full cost of a capital acquisition is enacted in advance so that
the full cost of capital projects is considered at the time decisions
are made to provide resources.  Budgeting for the full cost of an
asset in advance permits the Congress to compare the long-term costs
of spending alternatives and to better understand the budgetary and
programmatic impact of its decisions.

In contrast, when capital projects are funded incrementally, the
acquisition may not be fully analyzed or justified; major projects
may be cancelled and the associated sunk costs lost.  For example, a
recent GAO review of an agency's major system acquisitions identified
incremental funding as one of the key factors in the high rate of
cost overruns, schedule slippages, and terminations.\1 When
incremental funding is used, funds to continue a project must be
requested each year.  For many projects, particularly in their first
years of development and construction, the funding received is
considerably below the amount requested.  This causes project
schedules to slip and costs to rise.  Charges, such as contractor
costs and certain administrative costs, generally would be incurred
each month no matter what the progress.  By knowing that the funding
will be available when needed, organizations and their contractors
should be better able to stay within cost estimates and keep the
projects on schedule.

From a federal government agency's point of view, however, full
funding can be problematic, especially under periods of constrained
budget caps.\2 An agency or program generally must absorb the entire
cost of a relatively expensive acquisition in a single year's budget
even though the benefits may accrue over many years.  As GAO
explained in a 1996 report,\3 however, some strategies currently
exist at the federal level that allow agencies a certain amount of
flexibility in funding capital projects without a loss of fiscal
control.  These strategies include budgeting for stand-alone stages,
as well as more innovative approaches, such as using an investment
component and outsourcing capital-intensive services.

Decision-making based on good, firm cost estimates of the full cost
of a project also helps agencies to fully fund projects up front.
Having a good estimate of the cost of a project before committing
resources to it allows decisionmakers to make more informed decisions
and allocate funding more accurately and effectively.

We have found that it is not only the federal government that is
concerned about maintaining control over capital expenditures while
allowing flexible funding options.  Most of the other organizations
in our study make a commitment to the full cost of a capital project
up front and have developed their own alternative methods for
maintaining budgetary control while allowing flexibility in funding.

--------------------
\1 Department of Energy:  Opportunity to Improve Management of Major
System Acquisitions (GAO/RCED-97-17, November 26, 1996).

\2 The Balanced Budget and Emergency Deficit Control Act of 1985, as
amended, sets limits on budget authority and outlays for
discretionary spending programs for fiscal years 1998 through 2002.
Discretionary programs are those that receive their budgetary
resources in appropriations acts.  Constrained discretionary spending
has played a major role in reducing the deficit since 1991 and new
statutory limits on discretionary spending are particularly tight
after the year 2000.

\3 Budget Issues:  Budgeting for Federal Capital (GAO/AIMD-97-5,
November 12, 1996).

         PRACTICE 7:  BUDGET FOR
         PROJECTS IN USEFUL
         SEGMENTS
---------------------------------------------------- Chapter III:0.0.1

One strategy that has proven useful to organizations in dealing with
the problems posed by full funding in a capped budget environment is
to budget for projects in useful segments.  This means that, when a
decision has been made to undertake a specific capital project,
funding sufficient to complete a useful segment of the project is
provided in advance.  OMB has defined a useful segment as a component
that either (1) provides information that allows the agency to plan
the capital project, develop the design, and assess the benefits,
costs, and risks before proceeding to full acquisition (or canceling
the acquisition) or (2) results in a useful asset for which the
benefits exceed the costs even if no further funding is
appropriated.\4

For full up-front funding and the funding of useful segments to be
effective, organizations must be able to develop good, firm cost
estimates of the full cost of either the project or the segment early
in the life of the project.  The organization must have good
information and data systems in place in order to be able to develop
these estimates.  Many of the state and local governments in our
study used a process called "predesign" to determine and provide
decisionmakers with detailed information about cost estimates and the
scope of work of a planned project before committing substantial
resources to the project.  For example, in one medium-sized state,
all major projects greater than $5 million must go through a
predesign process before submitting an application for design and
construction funding.  Officials also recommend that projects of less
than $5 million include a predesign phase when, for example, the
project has significant policy implications to a program, or involves
new state-of-the-art technology.  The predesign application should
include a description of the project, an analysis of the effects of
demographic and policy changes on capital needs, an explanation of
the process used to develop the capital request, an identification of
the operating cost impact, and a project cost plan, which includes
information about project scope and schedule.  The predesign
application must also communicate the relationship of the capital
project to the agency's strategic plan.  The development of
reasonable initial cost estimates early on in the planning process
has resulted in minimal scope and cost changes during later phases of
a project.

Several states and localities in our study fund capital projects in
useful or meaningful phases by breaking up their capital planning and
budgeting cycle into segments, such as predesign, design,
construction, and--in some cases--post-construction evaluation.
Funding is provided for one of these segments at a time and generally
is not guaranteed from one phase to the next.  For example two states
in our study by law cannot award a construction contract until the
funds for the contract are appropriated in full.  One of these states
contracts for useful phases with contract options for each useful
follow-on phase.  For example, it may contract for the design phase
with an option for construction as a second phase.  The state finds
that this approach is better than making a commitment to the entire
project and then concluding, after the design is completed, that it
prefers not to go to the second phase.

The Coast Guard sometimes divides capital acquisitions into
stand-alone stages and may request full funding for each stage over a
period of years.  For example, if the project is to procure 30
vessels, the agency may write a base-year contract for a lead ship
and spare parts (a useful segment) that also includes options to
purchase the remaining vessels over a period of years.  The agency is
only committed to the base-year acquisition and need not exercise any
of the options.  In the first year of the project, the agency would
request funds for the base-year contract.  In each subsequent year,
the agency would decide whether to request funds to exercise a
contract option and, if it did, the Congress would decide whether to
provide such funding.  Even if no further funds are provided, the
vessel already funded would be a useful asset for the agency.

   (See figure in printed
   edition.)

--------------------
\4 Principles of Budgeting for Capital Asset Acquisitions, Budget of
the United States Government, Fiscal Year 1998.

      PRACTICE 8:  CONSIDER
      INNOVATIVE APPROACHES TO
      FULL UP-FRONT FUNDING
------------------------------------------------------ Chapter III:0.1

Alternative strategies used by some leading organizations and federal
agencies to accommodate full funding of capital projects in a
constrained budget environment include contracting out for capital
intensive services, using an investment component that is similar to
a savings account, and developing public/private partnerships.  These
strategies enhance an organization's flexibility to finance the full
costs of capital projects without compromising top management's (or,
in the federal arena, the Congress') ability to make decisions based
on full costs.

One private sector company we studied selectively uses outsourcing as
an alternative to capital investment.  This company outsources most
of its chip manufacturing, which is a capital-intensive process.  The
company must address two questions before deciding to outsource a
specific function.  The first is whether the company can perform the
function better or less expensively than other organizations, and the
second is whether the function is essential to the company's core
competencies.  If the answer is no to both questions, then the
company will outsource the function.  Managers said that while the
company does lose some control by outsourcing, it attempts to monitor
the outsourcing decision by asking throughout the decision-making
process whether or not the company is creating shareholder value.
This company will not outsource a function unless it believes
shareholder value will be created.  Because a decision has been made
not to own the assets needed to manufacture the chips, the
organization now does not have to pay for all of the costs associated
with this large and expensive investment.

In the federal arena, permitting agency managers to save for the
purchase of some needed capital investments may promote better
planning and make it possible for agencies to budget for the full
cost of such investments within constraining caps.  In at least one
case the Congress provided an agency with authority to establish an
investment component, similar to a savings account, in its working
capital fund, allowing managers who comply with specified
requirements regularly to set aside and save annual appropriations
for future purchases of expensive equipment.  This gives managers an
incentive to plan and save some otherwise annually expiring funds for
future capital needs.  As GAO noted in an earlier report,\5 however,
this "savings account" approach should be accompanied by detailed
investment plans to ensure that funds are spent as the Congress
intended.  This particular agency has placed restrictions on the use
of its investment component to reflect congressional intentions
regarding use of the agency's working capital fund.

In a public/private partnership, the private sector generally shares
the risk as well as the financing with the government.  This type of
partnership can accommodate full funding because the government is
required to pay for less of the investment up front, thereby freeing
current resources for other projects.  The private sector pays for a
portion of the project and both sectors may be reimbursed through
user fees.

   (See figure in printed
   edition.)

--------------------
\5 GAO/AIMD-97-5, November 12, 1996.

USE PROJECT MANAGEMENT TECHNIQUES
TO OPTIMIZE PROJECT SUCCESS
=========================================================== Chapter IV

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

In order for projects to be successfully implemented, they must be
well managed.  Many organizations apply a variety of project
management techniques to optimize project success and enhance the
likelihood of meeting project-specific as well as organizationwide
goals.  These techniques include monitoring project performance,
establishing incentives to meet project goals, and developing a
project management team with the right people and the right skills.
This can help avert cost overruns, schedule delays, and performance
problems that have characterized some major federal capital projects.

Our case studies have stressed the importance of developing
performance measures and linking capital projects and their expected
outcomes to unit and strategic goals and objectives.  As one private
sector official said, "overarching goals for the project, business
unit, and organization are translated to individual groups and
managers and the results are fed back up the line." We also found
that successful organizations monitor project performance and
establish incentives for accountability, and use cross-functional
teams to involve those with the technical and operational expertise
necessary to plan and manage the project.

         PRACTICE 9:  MONITOR
         PROJECT PERFORMANCE AND
         ESTABLISH INCENTIVES FOR
         ACCOUNTABILITY
----------------------------------------------------- Chapter IV:0.0.1

Successful implementation of a capital investment project is
determined primarily by whether or not the project was completed on
schedule, came in within budget, and provided the benefits that were
intended.  As noted previously, however, the first step is to provide
decisionmakers with good information about cost estimates, risk, and
the scope of a planned project before committing substantial
resources to it.  This, in combination with full up-front funding,
can help to prevent cost overruns, project cancellations, and
projects that fail to meet completion schedules.  By monitoring
project performance against cost, schedule, and technical performance
goals, as well as establishing incentives to meet those goals
organizations can increase the likelihood that a project will be
successfully completed.

Identifying and managing risks such as changes in scope and poor cost
estimates limits the number of projects that will not meet
established goals.  The risk of failing to meet cost and schedule
goals can be reduced by periodic monitoring of whether or not interim
goals are being met.  Early recognition of problems allows for timely
intervention which increases the likelihood that corrective action
will get the project back on track before significant deviation from
goals occurs.  In addition, early awareness of cost overruns or
schedule slippages may aid in identifying serious underlying
problems.  For example, cost overruns during initial project
implementation may be symptomatic of poor cost estimation.

Typically, a project plan is used to manage and control project
implementation and includes performance measurement baselines for
schedule and cost, major milestones, and target dates and risks
associated with the project.  By tracking cost, schedule, and
technical performance, a project team is aware of potential problem
areas and is able to determine any impact of the deviation and decide
if corrective action is needed.\1 Regular review of the status of
cost, schedule, and technical performance goals by individuals
outside the project team allows for an independent assessment of the
project and verification that the project is meeting stated goals.
Leading organizations also establish incentives to encourage teams to
meet project goals.

Leading organizations we studied generally hold project managers
accountable for meeting cost, schedule, and performance goals.  Some
of these organizations allow individual project managers to decide
what management tools best meet their needs to monitor and track
project milestones and to identify cost and schedule variances from
the project plan.  Typically, actual cost and schedule are measured
against a baseline established in the project plan used to obtain
funding.  Deviations from the plan are investigated to identify
problems, and if necessary, revise scheduled start and finish dates
or rebaseline the entire project.  However, an official noted that it
is important to distinguish between variations that should have been
avoided and legitimately unavoidable/unforeseen overruns.  This is
particularly important if meeting project costs is part of a reward
system.  As one corporate executive noted, no matter how good cost
estimates are, there may still be overruns; for example, if it rains
all month project construction will not start on time.

Leading organizations we studied pointed to a number of built-in
incentives for managers and teams to meet project goals.  Among them
were the reporting of project status to individuals or groups in
positions of authority outside the particular project, the difficulty
of asking for additional funds, and the use of the project manager's
overall performance in determining the assignment of future projects.
For example, leading private sector companies generally must report
the status of projects to either the board of directors or an
executive-level committee.  Such oversight makes the project
accountable to an authority outside of the project team and provides
pressure to meet established cost, schedule, and technical
performance goals.  In addition, management consequences typically
are invoked if a project does not meet its established goals.  For
example, the project manager's responsibilities may be downgraded to
projects with less strategic importance, or a division manager may be
reassigned or fired.  If a project is of significant strategic
importance, failure may put the viability of the entire organization
at risk.

At the state and local government level, periodic reporting of
project status to an entity outside the project team is often
required.  As with private sector companies, this independent
oversight of progress toward project goals is one incentive for
managers and projects teams to meet their goals.  In one local
government, the executive committee of the Citizen's Bond Committee,
which is a citizens' group composed of approximately 250 private
citizens, annually reviews the city's capital plan in conjunction
with the city's budget and research department.  The objectives of
the review are to ensure that projects are fiscally sound and
continue to meet the voters' intent.  The reviews also track project
cost and schedule, and the accuracy of revenue assumptions used to
carry out the projects.  This local government also created an
incentive for program managers to meet cost goals by setting a
precedent of denying additional funding beyond that in the approved
budget.  For example, the construction of a local library had
exceeded its budget prior to furnishing one of the floors.  Despite
requests for additional funding, the city council did not authorize
any more funds to complete the floor.  It is currently being
completed through private donations.

Another incentive to meet project goals is the use of a team's
performance on a completed project as criteria in assigning team
members to future projects.  For example, a state agency matches
managers' experience and qualifications with the complexity and
difficulty of the projects to which they are assigned.  The agency
tends to staff large complex projects with project managers who have
proven their abilities.  Project managers less experienced or less
capable are assigned to less complex projects.  In addition to
documenting and using internal performance, this agency has developed
performance guidelines for its contractors.  If these guidelines are
not met, the agency does not hire the contractor for future projects.

Our federal case study, the Coast Guard, incorporates operating
savings expected from the implementation of a capital project into
its operating budget.  Since a less costly operating budget is
reflected in the agency's budget request to OMB and the Congress,
upper-level management, OMB, and the Congress expect these savings to
materialize.  This creates a strong incentive for the project team to
carefully manage the schedule and technical performance of the
project and for upper-level management to monitor performance so that
corrective action can be taken if problems arise.

   (See figure in printed
   edition.)

--------------------
\1 The Federal Acquisition Streamlining Act of 1994, P.L.  103-355,
Title V, 108 Stat.  3349-3351, requires agencies to establish and
track major acquisitions against cost, schedule, and performance
goals.  The head of each civilian agency shall approve or define the
cost, performance, and schedule goals for major acquisition programs
of the agency, while the Secretary of Defense shall approve or define
the cost, performance, and schedule goals for major defense
acquisition programs of the Department of Defense and for each phase
of the acquisition cycle of such programs.

         PRACTICE 10:  USE
         CROSS-FUNCTIONAL TEAMS TO
         PLAN FOR AND MANAGE
         PROJECTS
----------------------------------------------------- Chapter IV:0.0.2

Leading organizations use multidisciplinary teams, consisting of
individuals from different functional areas and led by a project
manager, to plan and manage projects.  Team members may change
somewhat for different phases of the project, but members typically
represent those who have a major interest in the project and include
people from the user community, budget, accounting, engineering,
procurement, and other functions.  Typically, a core project team is
established early in the life cycle of a project and additional
individuals with particular technical or operational expertise are
incorporated during appropriate phases of the project.  For example,
the user group component of the team may be heavily involved in
determining requirements during the planning stage, but during
project implementation may only be consulted when needed, such as for
reviewing the impact of proposed changes.  The team must not only
possess technical and operational expertise, but, as an executive
explained, it must also be composed of the "right" people.  The
selection of the team members is critical--they must be
knowledgeable, willing to trade off leadership roles, and able to
plan work and set goals in a team setting.  He added that successful
teams typically have spirit, trust, and enthusiasm.

These cross-functional teams begin their work, in some instances, by
analyzing mission needs and alternative investments, and they
continue through the project development and implementation stages.
One official stated that a sense of ownership and the drive of the
team committed to a project were key factors in the successful
completion of a project.  This integrated and comprehensive approach
improves communication between upper management and project managers
and among the various stakeholders in the project.  It also increases
the likelihood that potential problems will be identified and
resolved quickly, thus increasing the likelihood that the project
will remain on schedule and within budget.

All of our private sector case studies use project teams to manage
their capital projects.  In one private sector company the team
members remain together from one project to the next so that lessons
learned from one project can be incorporated into the next project.

The Coast Guard also uses project teams made up of people drawn from
different functional areas.  These project teams typically include
members from engineering, acquisition, operations, personnel,
logistics, and testing.  Once selected, project managers are required
to attend a 20-week training course on project management.

   (See figure in printed
   edition.)

EVALUATE RESULTS AND INCORPORATE
LESSONS LEARNED INTO THE
DECISION-MAKING PROCESS
============================================================ Chapter V

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

Project implementation is often seen as the end point of the capital
decision-making process.  Leading organizations, however, continue to
track projects after implementation.  For example, they monitor
results to ensure that goals have been met and that resources have
been used efficiently and appropriately.  These organizations use
evaluation to improve the performance of future projects through a
modification of the existing process.

Leading organizations have a common trait--a desire to assess and
improve their performance.  Some of the organizations in our study
have implemented systematic procedures for evaluating project
results, while others have taken a broader approach and reevaluated
their capital decision-making processes as a whole.  One way to
evaluate project performance is to measure the extent to which
project outcomes have contributed towards goals and objectives that
were established when the project was approved.  This type of
evaluation can be incorporated into an organization's capital
decision-making process through a performance measurement system or
through post-completion evaluations or audits.

Some entities in our study chose to review the capital
decision-making process itself, which often resulted in major
revisions to their processes.  These organizations were willing to
take a critical look at themselves and how decisions were being made,
and were open to what, in some instances, were significant structural
and cultural changes.  The federal government is now, with the new
emphasis from OMB and the Congress, beginning to show the same
willingness to assess its processes and begin to make changes.

         PRACTICE 11:  EVALUATE
         RESULTS TO DETERMINE IF
         ORGANIZATIONWIDE GOALS
         HAVE BEEN MET
------------------------------------------------------ Chapter V:0.0.1

One way of determining if a capital investment achieved the benefits
which were intended when it was selected is to evaluate its
performance using measures that reflect a variety of outcomes and
perspectives.  By looking at a mixture of hard and soft measures,
e.g., financial improvement and customer satisfaction, managers are
able to assess performance based on a comprehensive view of the needs
and objectives of the organization.  To implement this balanced
approach to performance measurement, leading organizations in our
study developed financial and nonfinancial criteria for success that
link to the organization's overall goals and objectives.  Unit
managers then develop project-specific performance measures that are
tied to these criteria and which are used as the basis for developing
unit performance measures and goals.  The unit measures are
ultimately rolled up into a divisionwide or organizationwide
"scorecard," which measures how well the organization is meeting its
goals and objectives.  The scorecard allows managers to determine if
a unit and, ultimately, if a project have achieved the goals that an
organization has determined are important for its success, and if
not, where the weak areas and projects can be found.  Because unit
scorecards are generally linked to employee compensation, a balanced
approach to performance measurement provides a clear way of
connecting individual performance to the achievement of
organizationwide goals.

   (See figure in printed
   edition.)

   Figure V.1:  Using a Balanced
   Scorecard

   (See figure in printed
   edition.)

Figure V.2 provides another illustration of how performance measures
can be used to determine if an investment has achieved its intended
benefits.  One leading private sector company closely links project
performance expectations to the broader goals and objectives of both
the division and organization.  The planned costs and milestones for
several related projects are displayed below, along with the expected
impact on key performance indicators and overall performance
measures.  The goal in this case is to become the world's largest
marketer of product A.  One key strategy to achieve this is to
increase product A's production capacity.  To accomplish this goal,
new production sites must be added and their construction must be on
schedule and within cost.  Performance indicators measure the impact
of this specific strategy, while overall performance measures
determine whether the execution of a set of strategies has achieved
the desired results, such as increasing the market share of product
A.  Both of these types of measures aid in monitoring progress toward
achieving the goal of becoming the world's largest marketer of
product A while remaining the lowest cost producer.

   Figure V.2:  Linking
   Performance Measures to
   Strategies and Goals

   (See figure in printed
   edition.)

Another method for determining if an investment is contributing to
the success of an organization's goals and objectives is to conduct
an audit after the project is completed.  The primary focus of this
method is not to evaluate the technical aspects of the project, but
rather to evaluate the process and whether the end users are
satisfied.  A state university in our study requires that its Office
of Facilities Planning conduct a formal post-completion audit for all
capital projects.  The audit is conducted through survey forms
provided to (1) personnel with substantial managerial responsibility
for the project, (2) project architects/engineers, (3) the general
contractor, and (4) end users of the facility.  Survey questions
include:

  -- How well does the facility meet the end user's program needs?

  -- How effective was the management of the bid and the contract
     award process?

  -- How accessible were key decisionmakers?

The lessons learned from the audit are incorporated into the design
and construction of the next project with the goal of improving the
quality of the university facilities and the services provided for
students, faculty, staff, and visitors.

Closely related to post-completion audits are surveys that focus
primarily on customer satisfaction.  One private sector company in
our study interviews customers and asks them to rate the company.  It
also distributes detailed questionnaires to obtain specific feedback
on company performance.  The governor in another state in our study
issued an executive order requiring departments to define customer
satisfaction requirements and measure customer satisfaction.  The
state is currently developing a customer satisfaction survey to
determine if completed facilities are fulfilling program needs.

         PRACTICE 12:  EVALUATE
         THE DECISION-MAKING
         PROCESS:  REAPPRAISE AND
         UPDATE TO ENSURE THAT
         GOALS ARE MET
------------------------------------------------------ Chapter V:0.0.2

Although some organizations evaluate their capital decision-making
process on an ongoing basis, we found in our study that this was not
the norm.  Leading organizations seemed generally to revise their
processes in response to an internal crisis or to a perception of
changing needs and/or a changing environment.  In such situations,
these entities felt that they had to conduct difficult
self-assessments and undergo major changes in their capital
decision-making practices in order to continue successful operation.

   (See figure in printed
   edition.)

One state government in our study revised not only its capital
decision-making but also its budgeting process in an effort to
increase efficiency and accountability.  Prior to 1992, the capital
planning horizon in this state was only 2 years.  As the result of an
effort to develop a comprehensive approach to managing capital
planning, the state developed a 6-year capital plan, which is now the
basis for capital budget requests.  Then in 1994, the state evaluated
its new capital outlay process.  This study found that agencies still
often took a piecemeal approach to project planning, and identified
the need for improved communication between the agencies and the
central departments that review project requests.  The state also
reviewed its budget process and determined that it needed a mechanism
to establish priorities and focus scarce state resources on the
programs that demonstrate the best results.  In response to these
evaluations, the state implemented the use of project management
teams and began a performance budgeting process linking strategic
planning and performance measurement, of both capital and noncapital
activities, to budget development.  The state's new performance
budgeting process was selected as a benchmarking model by the
National Performance Review.

The Coast Guard is making significant changes to its capital planning
process in response to budget constraints and requirements related to
implementation of the Results Act.  The agency had already begun
implementing the Results Act when it began making changes to its
capital decision-making process.  Officials stated that this prior
implementation of the Results Act is making it easier for the agency
to convert to a new capital decision-making process focusing on
results.  The agency chartered an internal working group to develop a
long-term agency capital plan similar to the plan recommended in the
OMB Capital Programming Guide.  The capital plan will reflect changes
that the Coast Guard has made in its planning process over the past
several years.  Until recently, this agency incrementally selected
and replaced outdated assets, but it is now beginning to view its
assets as interrelated and as part of a single, coherent system.
Units within the agency are now planning for projects with the goal
of getting the best system performance at the lowest system cost.
Coast Guard officials believe that this new process will result in a
more efficient use of resources and funding and will enable the
agency to meet its goals more effectively.

MAJOR CONTRIBUTORS TO THIS
EXECUTIVE GUIDE
=========================================================== Appendix I

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.

Christine Bonham, Assistant Director
Hannah Laufe, Evaluator-in-Charge
Trina Lewis, Senior Evaluator
Sheri Powner, Senior Evaluator
David McClure, Senior Assistant Director
Tomas Ramirez, Senior Analyst

SEATTLE FIELD OFFICE

Tuyet-Quan Thai, Senior Evaluator
Margaret Buddeke, Evaluator

*** End of document. ***