Executive Guide: Leading Practices in Capital Decision-Making (Guidance,
12/01/98, GAO/AIMD-99-32).
Federal spending on major physical capital investments is projected to
total more than $68 billion in fiscal year 1999. Past management
problems and years of budget restraints have underscored the need to
strengthen capital decision-making and management. The Office of
Management and Budget (OMB) and GAO have been promoting better
decision-making practices to help ensure that the purchase of new assets
and infrastructure have the highest and most efficient returns to the
taxpayer and to the government and that existing assets will be
adequately repaired and maintained. 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. In 1994 and 1995, GAO
worked with OMB to produce guidance on evaluating information technology
investments. GAO produced a leading practices guide in that instance as
well and later produced additional guidance on information technology
investments. The information provided in OMB's Capital Programming Guide
and in this GAO executive guide applies to all forms of capital
investment, including information technology, and should be used in
conjunction with other GAO and OMB information technology guidance.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-99-32
TITLE: Executive Guide: Leading Practices in Capital
Decision-Making
DATE: 12/01/98
SUBJECT: Information resources management
Private sector practices
Strategic planning
Agency missions
Cost analysis
Federal procurement
Information technology
Decision making
Financial management
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United States General Accounting OfficeGAO Accounting and
InformationManagement Division
December 1998 EXECUTIVE GUIDE
Leading Practices inCapital Decision-Making
GAO/AIMD-99-32
Preface
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.
In July 1997, OMB issued 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 guide2 in that instance as well and
1Evaluating Information Technology Investments: A Practical Guide,
Office of Information and Regulatory Affairs, Information Policy
and Technology Branch, Office of Management and Budget,November
1995.
2Executive Guide: Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994).
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 1
Preface 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 pages 10 and 11, for providing us with information about their
practices and assisting us in producing this executive guide. We
would also like to thank the individuals who provided helpful
comments on the exposure draft of this guide.4
This guide was prepared under the direction of Paul Posner,
Director, Budget Issues. If you have questions or comments about
the guide, he can be reached at (202) 512-9573. Other major
contributors are listed in appendix I.
Gene L. Dodaro Assistant Comptroller General Accounting and
Information Management Division
3Information 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 TechnologyInvestments (GAO/AIMD-98-89, March 1998).
4Executive Guide: Leading Practices in Capital Decision-Making,
Exposure Draft (GAO/AIMD-98-110, April 1998).
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 2
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 3
Contents Preface 1 Introduction 8 The CapitalDecision-Making
Framework
13
Principle I Integrate Organizational GoalsInto the Capital
Decision-MakingProcess
20
Principle II Evaluate and Select Capital Assets Usingan Investment
Approach
31
Principle III Balance Budgetary Control andManagerial Flexibility
When Funding CapitalProjects
48
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 4
Contents Principle IV Use Project ManagementTechniques to Optimize
ProjectSuccess
55
Principle V Evaluate Results and Incorporate LessonsLearned Into
the Decision-MakingProcess
62
Appendix I Major Contributors to This Executive Guide
72
Related GAO Products 75 Figures Figure 1: The Capital Decision-
Making Framework 14Figure 2: Principles and Practices 19
Figure I.1: Case Study--Assessing Resources Needed to Meet
Mission, Goals, and Objectives
24
Figure I.2: Issues and Needs Assessment 25 Figure I.3: Case Study-
-Identify Current Capabilities and
Determine Any Gap Between Current and Needed Capabilities
28
Figure I.4: Case Study--Identifying and Evaluating Alternative
Approaches to Meeting the Gap Between Current and Needed
Capabilities
30
Figure II.1: Case Study--Prepare Project Justification and
Establish Appropriate Levels of Review
35
Figure II.2: Elements of a Decision Package 36 Figure II.3:
Project Summary Form 38
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 5
Contents Figure II.4: Case Study--Link Criteria to Organizational
Goals
and Objectives
42
Figure II.5: Linking Criteria to Goals and Objectives 43 Figure
II.6: Example of Portfolio Management 45 Figure II.7: Case Study--
Develop a Long-Term Capital Plan That
Defines Capital Asset Decisions
47
Figure III.1: Case Study--Budgeting for a University Campus in
Useful Segments
52
Figure III.2: Case Study--Using Public/Private Partnerships to
Accommodate Full Funding
54
Figure IV.1: Case Study--Monitor Project Performance and
Establish Incentives
59
Figure IV.2: Case Study--Use Cross-Functional Teams to Manage
Projects
61
Figure V.1: Case Study--Use a Balanced Approach to Evaluate
Results
64
Figure V.2: Using a Balanced Scorecard 65 Figure V.3: Linking
Performance Measures to Strategies and
Goals
67
Figure V.4: Case Study--Evaluating and Updating the
Decision-Making Process
69
Abbreviations BEST Budget Evaluation Study Team 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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 6
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 7
Introduction
The Congress, the Office of Management and Budget (OMB), 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 on capital assets.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, implementing those choices
well, and 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,
1Statement 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."
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 8
Introduction 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 to 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 by requiring that agencies engage in capital
planning and performance and results-based management. 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 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 aforementioned requirements into
their capital planning process.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 9
Introduction Objectives, Scope,and Methodology The objectives of
our research were to (1) identify which government andprivate
sector 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 private sector 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, the U.S.
Advisory Commission on Intergovernmental Relations,2 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 elements of quality; references 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
2The Advisory Commission on Intergovernmental Relations is no
longer in existence.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 10
Introduction
* 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. We did not assess
the quality of the Coast Guard's planning, budgeting, and
acquisition processes. 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 and
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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 11
Introduction Members of the U.S. Coast Guard and the Private
Sector Council have each reviewed two drafts of this document.
Officials at OMB, as well as a representative of a leading
academic organization, have also reviewed this guide, and we have
incorporated their comments as appropriate. The guide was first
issued as an exposure draft for comment in April 1998 and widely
distributed to persons within and outside of government. Comments
were received from 20 individuals between May 1998 and September
1998 and have been incorporated as appropriate. The comments
primarily noted the usefulness of the guide and some suggested
ways to clarify and/or strengthen points that it contained.
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
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 postimplementation reviews.
The examples provided in this executive guide can be used to
illustrate these concepts as they are discussed in the OMB Capital
Programming Guide.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 12
The Capital Decision-Making Framework
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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 13
The Capital Decision-Making Framework Figure 1: The Capital
Decision-Making Framework
Information Communication
Strategic Planning Vision
Principle I Principle II Principle III Principle IV Principle V
Integrate organizational
goals into the
capital decision-making
process
Evaluate and select capital
assets using an investment
approach
Balance budgetary control and managerial flexibility when
funding capital
projects
Use project management techniques to optimize project
success
Evaluate results
and incorporate lessons learned
into the decision-making
process
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 14
The Capital Decision-Making Framework 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.
Vision Vision and leadership are crucial to the success of
leadingorganizations--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. Subunits 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 reengineering and
expected savings. Greater resources will then be devoted to these
targeted areas, while other areas of the organization know 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, the President and the Congress 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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 15
The Capital Decision-Making Framework 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 In successful organizations, strategic planning
guides the decision-makingprocess 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 (1) the needs of their
clients and constituents and (2) 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 evaluation 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 andData Systems 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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 16
The Capital Decision-Making Framework 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 to make 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 In leading organizations, clear communication of an
organization's visionand 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 subunits 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 subunits within
the organization and are ultimately used to measure the
performance of individual projects and employees.
Principles andPractices From these critical success factors, we
distilled five general principles thatleading 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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 17
The Capital Decision-Making Framework 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.
This guide is composed of five principles divided into 12
practices, as illustrated in figure 2.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 18
The Capital Decision-Making Framework Figure 2: Principles and
Practices
Principles Practices
II. Evaluate and select capital assets using an
investment approach
4. Establish review and approval framework supported by
analyses 5. Rank and select projects based on
established criteria
6. Develop a long-term capital plan that defines capital
asset decisions
III. Balance budgetary control and managerial flexibility
when funding capital projects
7. Budget for projects in useful segments 8. Consider innovative
approaches to full up-front funding
I. Integrate organizational goals into the capital
decision-making process
1. Conduct comprehensive assessment of needs to meet results-
oriented goals and objectives 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 3. Decide how best to meet the gap by identifying and
evaluating alternative approaches (including
noncapital approaches)
IV. Use project management techniques to optimize
project success
9. Monitor project performance and establish
incentives for accountability 10. Use cross-functional teams to
plan for and manage projects
V. Evaluate results and incorporate lessons learned
into the decision-making process
11. Evaluate results to determine if
organizationwide goals have been met 12. Evaluate the decision-
making process: reappraise and update to ensure
that goals are met
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 19
Principle I Integrate Organizational Goals Into the Capital
Decision-Making Process
Principle I Integrate organizational goals into the capital
decision-making process
Practices:
Assess resources needed to achieve results
Identify gap between current and needed capabilities Evaluate
alternatives-- including noncapital options
Principle II Evaluate and select capital assets using an
investment approach
Practices:
Establish review and approval framework
Use established criteria to rank and select projects Prepare long-
term capital plan
Principle III Balance budgetary control and managerial flexibility
when funding capital projects
Practices:
Budget in useful segments
Consider innovative approaches to full funding
Principle IV Use project management techniques to optimize project
success
Practices:
Monitor performance and establish incentives for
accountability Use cross-functional teams
Principle V Evaluate results and incorporate lessons learned into
the decision-making process
Practices:
Evaluate and compare results to goals
Evaluate the decision-making process
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 20
Principle I Integrate Organizational Goals Into the Capital
Decision-Making Process
Assess resources needed to achieve resultsIdentify gap between
current and needed capabilities Evaluate alternatives--including
noncapital options
Leading organizations begin the capital decision-making process by
defining the organization's 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 based on the program's goals and objectives.
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 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 the organization's goals
and objectives, including examining both capital and noncapital
alternatives.
Practice 1: ConductComprehensive Assessment of Needsto Meet
Mission and Results-OrientedGoals and Objectives
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 stated goals and objectives are aligned with the
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
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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
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 to be updated.
In 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 those 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
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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 are 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 (figure I.1), 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 I.2 for a graphic depiction
of this process.
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Principle I Integrate Organizational Goals Into the Capital
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Figure I.1: Case Study--Assessing Resources Needed to Meet
Mission, Goals, and Objectives
One state government recently implemented a performance budgeting
process that required each state agency to conduct an issues and
needs assessment. The assessment was the first step in the budget
development process for that budget cycle. The state's planning
and budget department coordinated the issues and needs
assessment, providing agencies with specific guidance and training
and making budget analysts and managers available to answer
questions. While various methods were used to conduct the
individual assessments, the state required each agency to
dedicate a management team to the effort and produce specific
outcomes. For example, each agency was required to prepare an
updated listing of its functional activities in priority order.
Upon completion of the assessment, agency managers were required
to formally present the assessment results to selected members of
the governor's cabinet, staff from the governor's office, and the
planning and budget department.
The management teams were directed to assess the full range of
internal and external factors that affect their agency's
operations. In doing so, they examined internal factors such as
past agency accomplishments and areas for improvement, the
agency's mission and primary activities, its organizational
structure, agency strengths and weaknesses, and physical space
needs and maintenance requirements. The external factors reviewed
included major federal and state mandates, the governor's
initiatives and priorities, and customer groups and their
requirements.
A thorough discussion of past agency accomplishments and of areas
identified for improvement provided a useful starting point for
conducting the needs assessment. A list of accomplishments was
prepared and examined to decide which accomplishments were most
significant. The management team then made a comparison of what
the agency had planned to achieve at the start of the previous
budget cycle and what was actually achieved, and the gaps were
documented as areas for improvement. Agency managers reviewed the
agency's mission statement focusing on its current purpose, why
it exists, and the role that it fulfills within state government.
The list of primary agency activities was also scrutinized to
determine if modifications were needed, including a review of how
the activities were being accomplished at that time. Examining
the agency's organizational structure included assessing the
impact of recently enacted budget and personnel policies and
examining the agency's physical plant, including surveying space
needs and current and future maintenance requirements.
To assess the agency's external environment, the management team
began with a re-examination of the federal and state mandates
resulting from various laws, regulations, and state policies. For
each mandate, the team assessed the estimated cost associated with
meeting the mandate and the benefits received by citizens. The
team then identified the specific agency programs and activities
that were critical to achieving the governor's initiatives and
priorities. Finally, agency managers generated a list of the
agency's primary customer groups, ranked the list in priority
order, and evaluated how well the agency has done in serving its
customer needs. Information from the issues and needs assessment
was used to proceed to the next step in the state's budget
development process. This step required each agency to ask the
question, If the agency did not exist today, how would our
customers and taxpayers best be served? The possible responses
to this question were: transfer the activity to another agency
(indicating which agency), privatize the activity, or eliminate
the activity. The management team was required to determine the
five most viable candidates in each category. For each candidate,
the cost savings, efficiency benefits, and restructuring
opportunities, along with the economic, political, and social
ramifications, were examined. This analysis resulted in 53
programs in 30 agencies being identified for privatization and 46
programs in 31 agencies identified for reorganization or right-
sizing, including some elimination. These changes are expected to
result in an estimated $105.9 million in budget savings. In
addition, the Department of Transportation was able to privatize
over $100 million in multi-year transportation road maintenance
projects.
Using the information gathered from both the issues and needs
assessment and the activity analysis, agencies were able to
identify their needed resources, including capital requirements.
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Figure I.2: Issues and Needs Assessment
Analysis of components of agency activities
High-level presentation and
discussion
Activity Privatize Transfer Eliminate Retain
Rationalefordisposition
1 2 3 4
Appropriate disposition Activity Decision Table
If the agency did not exist today, how would our customers and
taxpayers best be served?
Privatize activity? Transfer activity? Eliminate activity? Retain
activity?
Develop goals, objectives, strategies, and performance measures
for remaining activities
Agency mission and list of activities by priority
Space needs and maintenance requirements
Clients and their requirements Governor's initiatives and
priorities
Agency strengths, weaknesses, opportunities, and threats
Federal and state mandates Elements examined
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Principle I Integrate Organizational Goals Into the Capital
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Practice 2: IdentifyCurrent Capabilities, Including the Use ofan
Inventory of Assets and Their Condition,and Determine If There Is
a GapBetween Current and Needed Capabilities
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 accounting standards now require agencies to
report information on the deferred maintenance of federal assets.
A critical step in making deferred maintenance estimates is taking
a complete and reliable inventory of capital assets as a basis for
assessing 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 assets and facilities. Asset and
facility inventory systems are maintained and frequently updated
to provide managers with timely, current, and useful information
with which the managers 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 each asset's 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 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
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Principle I Integrate Organizational Goals Into the Capital
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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 having
qualified personnel with a strong working knowledge of the asset
or facility 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
any gaps between what is needed to fulfill their objectives and
what resources are currently available. Figure I.3 describes the
systems used by one state government to track its assets and
assess current capabilities.
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Principle I Integrate Organizational Goals Into the Capital
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Figure I.3: Case Study--Identify Current Capabilities and
Determine Any Gap Between Current and Needed Capabilities
One large state government maintains three levels of inventory
systems to identify and control its capital assets and facilities:
a statewide inventory, individual agency inventories, and an
inventory of deferred maintenance. The state also requires
routine asset and facility condition assessments and uses the
resulting information to track deferred maintenance needs and
budget for repair and replacement costs. The statewide inventory
is maintained through the state's fixed asset accounting and
control system. This database of capital assets is updated at
least annually to reflect new assets acquired and old assets
disposed of. It includes information such as the cost or value of
an asset, its estimated useful life, and depreciation. Reports
generated by the statewide inventory system identify assets within
an agency that are available for use by other departments or
divisions and surplus assets within the state that may be
available for any agency. Individual agency inventory systems
supplement the statewide inventory to provide a complete listing.
State agencies are required to include in the statewide inventory
all assets with a historical cost or value of $5,000 or more.
Agencies have the discretion to include assets valued at less than
$5,000 in the statewide inventory or develop their own tracking
and control system. Some agency inventory systems also contain
asset condition assessment information in addition to data on
asset existence. Using information from these inventory systems,
agency managers can identify capital assets and facilities that
are aging and that may require maintenance, upgrade, or
replacement in the near term or in the future. Some agency
managers assess the condition of their capital assets and
facilities annually, while other agencies perform this assessment
at a minimum of every 2 years. Agencies include information from
asset condition assessments when submitting their capital project
requests to the state's planning and budget department. When
requesting funding for new assets or facilities, agency managers
must fully describe the agency's current assets and facilities,
including information on the adequacy of existing assets and
facilities to meet current and future program demands.
Supporting information includes age and condition of the current
asset or facility, an analysis of staff hours invested annually in
repairs, interruptions or backlogs of services caused by aging or
inadequate assets, and any health and safety code violations.
Information from capital inventory systems and condition
assessments is useful to agency managers because it provides the
basis on which to plan for future asset replacements.
Information from the inventories and condition assessments is also
used to update an agency's maintenance reserve plan, a process
that began in the early 1980s and is unique to this state
government. Each agency is required to submit a plan to the
state's planning and budget department showing all assets and
facilities that require maintenance during the upcoming 6 years.
Agencies are required to update their maintenance reserve plans
biennially as part of the budget process. The planning and budget
department bases its maintenance reserve funding recommendations
on the biennial update of the agency's maintenance reserve plan.
The maintenance reserve plan also serves as an inventory of
deferred maintenance projects. According to state officials,
maintenance of capital assets and facilities is the state's first
priority-- before acquisition or construction of new assets--and
the maintenance reserve process enables the state to identify high
cost maintenance requirements, group similar needs as umbrella
projects, and budget for such projects as capital items rather
than relying on operating budget funds for this purpose. At the
end of the fiscal year, agencies are required to report to the
planning and budget department on the manner in which they have
used their maintenance reserve allocations and on the completed
projects.
Practice 3: DecideHow Best to Meet the Gap by Identifyingand
Evaluating AlternativeApproaches (Including NoncapitalApproaches)
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.
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Principle I Integrate Organizational Goals Into the Capital
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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 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 government
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 frequently. Figure I.4 describes
how two state governments evaluate alternative approaches to
satisfying capital needs.
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Principle I Integrate Organizational Goals Into the Capital
Decision-Making Process
Figure I.4: Case Study--Identifying and Evaluating Alternative
Approaches to Meeting the Gap Between Current and Needed
Capabilities
One state government we studied conducts a series of capacity
planning studies of state institutions. These reviews, which seek
to achieve the optimal use of state facilities, evaluate
alternatives such as conversion, expansion, and consolidation.
Optimal use is achieved through identifying and implementing the
best use of existing facilities and identifying the best way to
build new quality facilities at the lowest cost. Capacity planning
studies typically target state institutions that experience high
growth in capital costs, such as juvenile rehabilitation, and
those that serve different classifications of people, such as
corrections, where adult inmates are divided into minimum, medium,
and maximum security populations. Varying needs of the different
security populations result in significantly different capital and
operating costs. Construction costs for minimum security
facilities average $17,000 per capita, while costs for maximum
security facilities that have larger space and higher security
requirements average $120,000 per capita. Converting certain
medium security facilities that meet the space and security
configuration of maximum security facilities into maximum security
facilities could result in tremendous savings when compared to
building a new facility. For example, the state recently
converted a 692-bed single-bunked medium security facility to
maximum security for $3 million, while new construction costs for
a similar facility would have exceeded $70 million. Medium
security beds will be replaced with double-bunked, highly
efficient housing units at approximately $50,000 per bed. The
capacity planning study for the Department of Corrections also led
to the expansion of minimum security camps to 400 beds to take
advantage of economies of scale and led to the consolidation of
smaller women's inmate housing into larger units to lower the
ratio of security staff to inmates. Another state government we
studied uses information obtained from asset and facility
condition assessments to help determine whether existing assets
can satisfy its capital needs. The state recently considered
tearing down and rebuilding two of its prisons. After careful
evaluation, decisionmakers decided it was more cost-effective to
upgrade the infrastructure of the existing facilities and enhance
their useful life. Funding was provided for new heating systems,
overhead sprinkler systems, and asbestos removal, among other
things. Although the cost amounted to several million dollars,
it would have cost far more to construct new prisons.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Principle II Evaluate and select capital assets using an
investment approach
Practices:
Establish review and approval framework
Use established criteria to rank and select projects Prepare long-
term capital plan
Principle III Balance budgetary control and managerial flexibility
when funding capital projects
Practices:
Budget in useful segments
Consider innovative approaches to full funding
Principle IV Use project management techniques to optimize project
success
Practices:
Monitor performance and establish incentives for
accountability Use cross-functional teams
Principle V Evaluate results and incorporate lessons learned into
the decision-making process
Practices:
Evaluate and compare results to goals
Evaluate the decision-making process
Principle I Integrate organizational goals into the capital
decision-making process
Practices:
Assess resources needed to achieve results
Identify gap between current and needed capabilities Evaluate
alternatives-- including noncapital options
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Establish review and approval frameworkUse established criteria to
rank and select projects Prepare long-term capital plan
An investment approach builds on an organization's assessment of
where it should invest its resources for the greatest benefit over
the long-term. Establishing a decision-making framework which
encourages the appropriate levels of management review and
approval is a critical factor in making sound capital investment
decisions. These decisions are supported by the proper financial,
technical, and risk analyses. We found that leading organizations
not only establish a framework for reviewing and approving capital
decisions, they also have defined processes for ranking and
selecting projects. 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 and assist
with developing current and future budgets.
When choosing 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. In addition, they also
consider 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 of five agencies'1 information technology (IT)
investment processes concluded that, while some agencies'
decision-making policies and procedures have elements of an
investment approach, 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
1GAO/AIMD-96-64, September 30, 1996. The five agencies studied
were the National Aeronautics and Space Administration, the
Internal Revenue Service, the National Oceanic and
AtmosphericAdministration, the U.S. Coast Guard, and the
Environmental Protection Agency.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
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, these organizations address three basic questions:
* Does the investment support the organization's goals?
* Is the organization obtaining the greatest benefits for the
least cost?
* Are current investments meeting the organization's expectations
or should
alternative investments be considered?
Practice 4: EstablishReview and Approval FrameworkSupported by
Analyses
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.
For example, 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 funds to
the business groups within the organization. After the funds are
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 chief executive Officer
(CEO) does not become directly involved in the capital investment
decisions made by the business groups; however, the CEO does
become directly involved when projects are of strategic
significance to the company as a whole or are very large and
capital intensive.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
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 to do, but are not necessarily
critical to the organization's goals.
A midwestern state we studied, 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 a project might not be funded.
As one official said, "You might not win, but you understand why
you lost."
As part of the capital review and approval process, leading
organizations develop a decision or investment package to justify
capital project requests. Although different organizations use
different names for these decision packages--such as business
cases or project requests--the packages 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 for a proposed
information system. Leading organizations also include some common
categories of information in the packages, such as links to
organizational objectives, solutions to organizational needs,
project resource estimates and schedules, and project costs,
benefits, and risks.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Decision packages provide decisionmakers with a valuable tool for
analysis and planning at the time the investment proposal is being
considered. 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. Figure II.1 discusses the
review and approval framework and how the decision package is used
by one global corporation.
Figure II.1: Case Study--Prepare Project Justification and
Establish Appropriate Levels of Review
This global company was having difficulty meeting its financial
targets in the early 1980s. This led the company's management to
evaluate its current planning and business processes and to refine
the company's decision-making approach. According to company
officials, a critical factor in this company's recent turnaround
has been its top management's involvement in defining the future
direction for the company. As part of this turnaround, the chief
executive officer and the top-level officers are now more involved
in communicating the company's vision and financial targets (the
"why" and the "what" in overall terms) downward to the company's
core business managers. Based on this communication, managers at
all levels now have a better understanding of what is required and
work to produce integrated plans and capital initiatives that
outline their particular group's strategies. In the area of
information technology (IT), this company has worked to make the
IT investment decision-making process a less bureaucratic and more
meaningful process for its managers. It did this by streamlining
the approval process and by getting greater input from its IT
managers. The organization has three major levels of review and
approval for IT proposals. At the lowest level, IT approvals are
made by a unit's senior management team. The team has the
authority to approve IT investments under $50,000. The review and
approval at this level is facilitated by senior IT managers
assigned to every unit's senior management team. Better decisions
are made because the IT managers bring functional knowledge to the
process. In addition to reviewing and approving less costly
projects, the teams also make recommendations to the company's IT
Council. The company's Chief Information Officer as well as
members from the various senior management teams serve on the
company's IT Council. The IT Council reviews and approves IT
acquisitions that have expenditures ranging between $50,000 and
$30 million. IT projects that exceed this range must be approved
by one of the company's two executive committees which align with
specific business areas. These executive committees are
represented by top-level management officers that have both
diverse corporate functional knowledge and experience. Each
committee acts both as a portfolio manager and investor and makes
investment decisions for the specific business area it represents.
As part of the IT review and approval process, each unit or
manager proposing an IT project must prepare a decision package
referred to as a Business Agreement for System Expenditure, as
illustrated in figure II.2. Each business agreement includes
full disclosure of all system life-cycle costs from project
initiation through implementation and ongoing operation and
maintenance expenditures, a detailed business justification
defining the system's ability to deliver hard dollar cost
reductions or increases in revenue,a formal model assessing the
strategic value of the system which recognizes that strategic
benefits may not be quantifiable, quantification of the risks
associated with the project (rewards must be balanced against
risks), anddocumentation describing the system's compliance with
the company-endorsed standard architecture and long-term strategic
vision for IT.
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Principle II Evaluate and Select Capital Assets Using an
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Figure II.2: Elements of a Decision Package
Benefits achievement
Derived benefits?Dollar value of benefits? How will benefits be
measured?
Standards
Consistency with infrastructure and technology standards? Has the
process been reengineered?
Business Agreement for System Expenditure (selected criteria)
Economic assessment What are the expected, most pessimistic, and
most optimistic outcomes concerning the following:
Net present valueFull life-cycle system cost Current funding
request
Major project milestones and deliverables What are the project
milestones, completion dates, and specific deliverables?
Risk assessment Rate the following from 0-5:
Organization Project characteristics Information systems
infrastructure
Strategic value assessment Rate the following from 0-5:
Strategic business alignmentExternal interaction Management
information support Strategic IT alignment
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Within leading organizations, a summary of the information
contained in the decision package is generally 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. The
executives focus more on the organization's overall strategy than
the individual projects.
Another 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.3.) 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.
Projectoverview
also has a risk classification that rates projects on business and
technical risk. The second category, project review
andschedule/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 5 years. Similarly, under
thebenefits
category, savings and benefits from cost avoidance, are projected
by year for 5 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.
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Principle II Evaluate and Select Capital Assets Using an
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Figure II.3: Project Summary Form
Resources Benefits
Project Overview
TE CH
NIC
AL
RIS K
BUSINESS RISK
Measurements Investment Tooling Related expense
Other
Cost avoidance
Savings
Measurement 2
Measurement 1
Measurement 3
Project Review Schedule / Assumptions Program Reviews
Strategic / Risk / HR assessments Contract specifications
Readiness (pilot run)
Definition Implementation
Improvement Program
Measure Analyze Improve Control
Technical Reviews Design & process concepts (scope)
Technical feasibility (design guidance) Design confirmation
Readiness (factory/supplier/commercial)
Project description: Leader: Team: Sponsor:
Key issues:
- MM / YY
Global Growth Productivity Improvement Quality
Categories
(5 year projections)(5 year projections ) B
B C A
PROGRAM CLASSIFICATION A B C
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Principle II Evaluate and Select Capital Assets Using an
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Decision packages are supported by detailed economic and financial
analyses. These types of analyses ranged from a complete cost-
benefit analysis--which includes full life-cycle costing,2
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., cost-benefit 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, "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. 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."
2OMB's Capital Programming Guide defines life-cycle costs of an
asset as all direct and indirect initial costs, including planning
and other cost or procurement, all periodic or continuing costs of
operationand maintenance, and cost of decommissioning and
disposal.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 39
Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Another approach used by a state government we studied is "value
analysis." Value analysis refers to a systematic and orderly
problem-solving approach that emphasizes improved value, quality,
and performance. This state refers to its approach as "value
methodology" and uses it to uncover potential construction
problems. The state budgets for major construction projects in
three phases--predesign, design, and construction. To obtain
additional assurance that projects are adequately planned for
during predesign, and properly implemented during design, the
state adopted a value methodology approach to project review.
In this state, value methodology encompasses two processes--the
Budget Evaluation Study Team (BEST), which reviews the predesign
phase, and a value engineering study, which occurs during the
design development phase, after approval of the schematic design.
BEST seeks to achieve quality by ensuring that agency planners and
their consultants have dealt with "big picture" issues such as the
overall problem to be solved and the overall cost of the project.
A value engineering study seeks to determine if the project's
design is technically sound and if the materials and method
suggested for completing the project meet requirements for value
and quality.
The BEST team consists of architects, engineers, and cost
estimators tailored to each type of project. The review involves
intense study of predesign documents, site visits, and meetings
with the predesign team. BEST is intended to confirm that the
project's concept and budget are realistic, to control future
costly scope creep, and to ensure that chosen projects are those
with the lowest life-cycle costs. Similarly, at the completion of
schematic design, a multidiscipline team of design and
construction experts meet to evaluate the design. Projects that
undergo BEST and/or value engineering studies are selected from
major projects that are estimated at $5 million or more, or that
have a high profile or are very complex.
Practice 5: Rank andSelect Projects Based on EstablishedCriteria
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 by viewing all proposed investments and existing capital
assets as a portfolio. Organizations generally find it beneficial
to rank projects because the number of requested projects exceeds
available funding.
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Principle II Evaluate and Select Capital Assets Using an
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Several organizations we studied use the organization's strategic
objectives as a basis for establishing decision-making criteria.
These criteria, such as increased cost savings, market growth, and
link to organizational strategies, 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.
Several organizations we studied, developed a ranked listing of
projects based on analysis and established criteria. Organizations
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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 41
Principle II Evaluate and Select Capital Assets Using an
Investment Approach
decisions are made. Figure II.4 describes the process used by one
state government that links criteria to state goals.
Figure II.4: Case Study--Link Criteria to Organizational Goals and
Objectives
One state uses criteria based on the governor's strategic goals
and objectives to score and support decisions on capital
investment projects. As part of the state's budgeting process,
every agency is required to submit its proposed capital projects
to the Department of Finance. The Department of Finance reviews
and scores every project based on predetermined strategic and
technical criteria, as illustrated in figure II.5. Projects can
receive scores ranging from 0 to 700 points in the specified
increments as shown. As illustrated, the maximum score of 700 is
possible either for projects of a critical nature or for those
meeting all requirements of specified strategic scoring criteria.
Critical projects include those which address life safety
emergencies or legal obligations. Only one critical dimension can
be selected, thus each dimension can receive a score of either
700 or 0. Strategic scoring criteria are applied to noncritical
projects and include, for example, (1) how closely the request is
linked to the agency's strategic mission, (2) the priority
assigned to the project by the requesting agency, and (3) if the
project results in operating savings or increased efficiencies.
According to a state official, good, noncritical projects
typically have a strategic score between 300 to 400 points.
Based on the scoring results, the Department of Finance recommends
a list of capital projects to the governor and the legislature for
use in the capital decision-making process. Although the scoring
process ranks all projects across all agencies, it is not a
guarantee as to which projects will receive funding. Instead,
the process provides a generally neutral evaluation of each
project that can be used as input in the overall decision-making
process. Also, by providing visibility, the process makes obvious
when other selection criteria are applied instead of the
rankings. Officials stated the scoring process also provides
political cover for decisionmakers when denying funding for
specific projects.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
Figure II.5: Linking Criteria to Goals and Objectives
I. Critical (Choose only one of the following: a, b or c) a.
Critical life safety emergency b. Critical legal liability
c. Prior binding commitment
700/0 700/0 700/0
700 700 700
II. Strategic a. Strategic linkage b. Safety concerns
c. Customer services/statewide significance
0/40/80/120 0/35/70/105 0/35/70/105 d. Agency priority e.
User and nonstate financing f. Asset management
25/50/75/100
0-100 0/20/40/60
120 105 105 100 100
60 g. Operating savings or efficiencies h. Contained in
statewide 6-year plan
0/20/40/60
0/50
60 50
Capital project scoring criteria
Possible
values
Maximum
score
700Maximum critical score
700Maximum strategic score
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 43
Principle II Evaluate and Select Capital Assets Using an
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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.6, 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 business environment risks, such as 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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 44
Principle II Evaluate and Select Capital Assets Using an
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Figure II.6: Example of Portfolio Management
Competitive advantage Ma rke t ad
van tag e
Low High
High
Wor
k to
imp
rove
pos
ition
Disc
ard
Top
pro
gram
s
B
A C
D E
F
G
HI
Country risk
Ec
on
om
ic b
ene
fit
LowHigh
High II. Economic benefit and country riskI. Market and
competitive advantage
Wor
k to
imp
rove
pos
ition
Disc
ard
Top
pro
gram
s
B
A C
D E
F
G
HI
Market advantage: An enterprise's ability to gain market share or
dominate a specific market Competitive advantage: An enterprise's
ability to achieve above-average performance in its competitive
environment
Economic advantage: The positive financial implications realized
through the execution of an enterprise's strategy
Country risk: The political (e.g., unstable government
environment) and economic (e.g., currency fluctuations) risks
associated with conducting business in a foreign country
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 45
Principle II Evaluate and Select Capital Assets Using an
Investment Approach
The risk of cost overruns is addressed by a medium-sized
organization by requiring managers to develop a series of
increasingly more accurate cost estimates before it selects and
develops projects. The company refines the scope and cost
estimates of its projects at different phases of the project life-
cycle. 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 6: Develop aLong-Term Capital Plan That DefinesCapital
Asset Decisions
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.
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Principle II Evaluate and Select Capital Assets Using an
Investment Approach
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.
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. Figure
II.7 provides an example of how one state government uses this
process.
Figure II.7: Case Study--Develop a Long-Term Capital Plan That
Defines Capital Asset Decisions
One medium-sized state government we studied prepares a 5-year
capital plan that assists the government in refining the scope and
cost estimate of individual project requests. This state finances
most of its capital projects through bond issues and generally
requires agencies to submit applications for initial project
design funding 5 years prior to the budget year--that is, in year
5 of the 5-year capital plan. While there are some exceptions to
this, approximately 70 percent of the requests for initial design
funding are made for year 5, with the remainder of the requests
primarily made for years 3 or 4 of the plan. The agencies are
required to resubmit an application and receive approval for the
project in each year of the plan. Resubmission of project
requests is the only way a project can move forward from year 5 to
year 4, and from year 4 to year 3, etc., until it reaches the
first year of the capital plan, which is the budget request for
the upcoming budget year. Only small project requests generally
appear for the first time in the budget year. Projects that go
into the capital plan in year 5 generally take about 7 years to be
funded. According to officials, approximately 85 percent of the
projects included in the capital plan eventually receive funding.
The annual review of capital project applications allows the state
budget office to determine if a project request continues to meet
the goals and objectives outlined in the agencies' strategic or
master plans. It also allows the project's cost and scope to be
refined each year over a 5-year period, which keeps project costs
within specified resource limits. State officials believe that
this up-front planning and continuous review are key factors in
why the state has limited cost overruns and few surprises once
project funding is approved.
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Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
Principle I Integrate organizational goals into the capital
decision-making process
Practices:
Assess resources needed to achieve results
Identify gap between current and needed capabilities Evaluate
alternatives-- including noncapital options
Principle II Evaluate and select capital assets using an
investment approach
Practices:
Establish review and approval framework
Use established criteria to rank and select projects Prepare long-
term capital plan
Principle III Balance budgetary control and managerial flexibility
when funding capital projects
Practices:
Budget in useful segments
Consider innovative approaches to full funding
Principle IV Use project management techniques to optimize project
success
Practices:
Monitor performance and establish incentives for
accountability Use cross-functional teams
Principle V Evaluate results and incorporate lessons learned into
the decision-making process
Practices:
Evaluate and compare results to goals
Evaluate the decision-making process
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 48
Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
Budget in useful segmentsConsider innovative approaches to full
funding Officials at leading organizations we studied 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 canceled and the associated sunk costs may be 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 in which
budget caps
1Department of Energy: Opportunity to Improve Management of Major
System Acquisitions (GAO/RCED-97-17, November 26, 1996).
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Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
constrain spending.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 another 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 we studied 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 forProjects in Useful Segments
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
2The 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 newstatutory limits on
discretionary spending are particularly tight after the year 2000.
3Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5,
November 12, 1996). 4Principles of Budgeting for Capital Asset
Acquisitions, Budget of the United States Government, Fiscal Year
1998.
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Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
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
we studied 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 we studied 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 we studied 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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 51
Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
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.
Figure III.1 describes how one state government budgets in useful
segments.
Figure III.1: Case Study--Budgeting for a University Campus in
Useful Segments
A state university is constructing a new campus for one of its
colleges. The state is funding the project in discrete and stand-
alone phases so that a completed building can be occupied and the
school can function while other phases of construction continue.
The first building to open will contain faculty offices,
classrooms, and the computer sciences department. This building
will be occupied upon completion and the second phase of the
project will commence. A university official said that this
phased approach also accommodates enrollment growth. The
university's enrollment is increasing but it currently does not
need to use all of the planned space on the campus. The
university expects to need the space as the campus is completed.
A university official stated that it did not make sense to devote
resources all at once to capital projects that will not be needed
until the future. If funding for the campus is discontinued for
some reason, the state will still have usable buildings that it
can occupy, lease, or sell.
Practice 8: ConsiderInnovative Approaches to FullUp-Front Funding
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. However,
it should be noted that agencies must obtain authority from the
Congress to establish an investment component.
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 at a lower cost 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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 52
Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
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. However, as GAO noted in an
earlier report,5 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. Figure III.2 discusses some of the
different types of public/private partnerships that are currently
being implemented.
5GAO/AIMD-97-5, November 12, 1996.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 53
Principle III Balance Budgetary Control and Managerial Flexibility
When Funding Capital Projects
Figure III.2: Case Study--Using Public/Private Partnerships to
Accommodate Full Funding
A state department of transportation (DOT) wanted to build and
operate a high-speed rail line but did not have the financial
resources to build the system on its own. By entering into a
public/private partnership with a private consortium, the state is
now able to share the costs of the new transportation system with
the private sector and use the expertise of private companies in
the construction and operation of an advanced technology system.
The private consortium has the exclusive right to construct and
operate the system in partnership with the state DOT. The
infrastructure will be financed with revenue bonds and further
supported by state DOT and federal funds. Private sector equity
financing will provide the rolling stock. Both the state and the
private sector organization have an equity share in the system and
terms and conditions have been established to balance the
allocation of financial risk between the public and private
sectors based on the ability of each sector to shoulder such risk.
The Congress has also authorized federal agencies to participate
in a number of public/private partnerships. For example, one
agency is sharing the renovation and maintenance costs of a
historical federal facility with public and private partners. The
partners are responsible for restoring the historical building in
return for a long-term lease. Another federal agency recently
received congressional approval to enter into certain limited
equity partnerships and to offer loan guarantees to private sector
developers. By underwriting the cost to the developer, agency
officials believe that employee housing can be obtained for
considerably less than if the agency were to build it directly.
Under the equity partnership arrangement, the agency would pay up
to one-third of the cost rather than the full cost of
construction. Both the developer and the government would recoup
their investment through user charges. Under the loan guarantee
program, the agency would guarantee loans made to a developer if
the proceeds were used to acquire or construct certain employee
housing for the agency. Under the Federal Credit Reform Act of
1990, funds for federal loans and loan guarantees are budgeted up
front to cover the full net present value cost to the government,
including the risk of default or nonpayment of a loan.
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Principle IV Use Project Management Techniques to Optimize Project
Success
Principle I Integrate organizational goals into the capital
decision-making process
Practices:
Assess resources needed to achieve results
Identify gap between current and needed capabilities Evaluate
alternatives-- including noncapital options
Principle II Evaluate and select capital assets using an
investment approach
Practices:
Establish review and approval framework
Use established criteria to rank and select projects Prepare long-
term capital plan
Principle III Balance budgetary control and managerial flexibility
when funding capital projects
Practices:
Budget in useful segments
Consider innovative approaches to full funding
Principle IV Use project management techniques to optimize project
success
Practices:
Monitor performance and establish incentives for
accountability Use cross-functional teams
Principle V Evaluate results and incorporate lessons learned into
the decision-making process
Practices:
Evaluate and compare results to goals
Evaluate the decision-making process
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 55
Principle IV Use Project Management Techniques to Optimize Project
Success
Monitor performance and establish incentives for accountability
Use cross-functional teams
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: MonitorProject Performance and EstablishIncentives for
Accountability
Successful implementation of a capital investment project is
determined primarily by whether the project was completed on
schedule, came in within budget, and provided the benefits
intended. As noted previously, however, the first step is to
provide decisionmakers with good information about cost estimates,
risks, 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.
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Principle IV Use Project Management Techniques to Optimize Project
Success
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 interim
goals are being met. Early recognition of problems allows for
prompt 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, to 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
1The Federal Acquisition Streamlining Act of 1994, Public Law 103-
355, Title V, 108 Stat. 3349-3351, requires agencies to establish
and track major acquisitions against cost, schedule, and
performancegoals. The head of each civilian agency is required to
approve or define the cost, performance, and
schedule goals for major acquisition programs of the agency, while
the Secretary of Defense isrequired to 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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 57
Principle IV Use Project Management Techniques to Optimize Project
Success
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
their boards of directors or executive-level committees. Such
oversight makes the projects accountable to an authority outside
of the project teams 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 a criterion in assigning
team members to future projects. For example, a state agency
matches managers' experience and
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 58
Principle IV Use Project Management Techniques to Optimize Project
Success
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 organization, 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. Figure IV.1 describes a project monitoring and
accountability process used at a state university.
Figure IV.1: Case Study--Monitor Project Performance and Establish
Incentives
At one state university, the project manager's primary
responsibilities are to ensure that the project is within budget
and on time. The project manager can choose from a variety of
management tools to monitor the project so that he can be alerted
to potential problems in time to take corrective actions. In
addition, the construction executive, a university employee,
monitors and controls all of the university's capital projects.
The construction executive investigates variations from planned
cost and schedule in order to quickly identify problems and get
the necessary people together to resolve the problem. Quarterly
reports on all capital projects show the status of each project,
including the cash flow. If the quarterly report indicates there
are problems--such as a significant change (e.g., a 10 percent
change) in the scope or cost, the board of regents must be
notified. Although most changes involving the need for additional
funds are handled with contingency funds, if the change requires a
large amount of additional funds, a request for a capital budget
amendment would be needed. It is highly unusual, however, for the
university to go back to the legislature and ask for additional
funding. If additional funds are needed, the board of regents is
notified and may approve the use of additional funds to meet the
funding shortfall. The legislature must be notified if internal
university funds are used to augment the project. Asking the
board of regents for additional funds is also held to a minimum
because doing so makes the university staff appear as if they
cannot manage projects.
Practice 10: UseCross-Functional Teams to Plan for andManage
Projects
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 and from the
organization's 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
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 59
Principle IV Use Project Management Techniques to Optimize Project
Success
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 study organizations 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. Figure IV.2 describes how one state government uses
cross-functional teams to plan for and manage capital projects.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 60
Principle IV Use Project Management Techniques to Optimize Project
Success
Figure IV.2: Case Study--Use Cross-Functional Teams to Manage
Projects
For major projects, one state government uses project management
teams to ensure swift project execution and prompt resolution of
problems. These core project teams are established early in the
capital planning and budget process and work together throughout
the life of the project. Each project management team within
this state government consists of agency staff, a planning and
budget analyst, a legislative analyst, real property management
staff, general services department engineering staff, a treasury
representative, and others. Project management teams can consist
of different persons during different phases of the project's life
cycle. Key staff, however, such as planning and budget analysts
and general services engineering staff, are part of the initial
project team and remain on the team until the project is
completed. The goals of project management teams include
defining the project's scope and developing cost estimates.
Potential cost problems or undesirable features are identified and
resolved quickly. State officials believe that the use of project
management teams improves communication, holds down costs, and
reduces the need for costly redesigns.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 61
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Principle I Integrate organizational goals into the capital
decision-making process
Practices:
Assess resources needed to achieve results
Identify gap between current and needed capabilities Evaluate
alternatives-- including noncapital options
Principle II Evaluate and select capital assets using an
investment approach
Practices:
Establish review and approval framework
Use established criteria to rank and select projects Prepare long-
term capital plan
Principle III Balance budgetary control and managerial flexibility
when funding capital projects
Practices:
Budget in useful segments
Consider innovative approaches to full funding
Principle IV Use project management techniques to optimize project
success
Practices:
Monitor performance and establish incentives for
accountability Use cross-functional teams
Principle V Evaluate results and incorporate lessons learned into
the decision-making process
Practices:
Evaluate and compare results to goals
Evaluate the decision-making process
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 62
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Evaluate and compare results to goalsEvaluate the decision-making
process Project implementation is often seen as the end point of
the capital decision-making process. However, leading
organizations 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 we studied
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 postcompletion evaluations or audits.
Some entities we studied 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: EvaluateResults to Determine If OrganizationwideGoals
Have Been Met
One way of determining if a capital investment achieved the
benefits that 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
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Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
implement this balanced approach to performance measurement,
leading organizations we studied 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 has 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. Figure V.1 describes how a balanced
approach to performance measurement was used within a large
corporation.
Figure V.1: Case Study--Use a Balanced Approach to Evaluate
Results
One division within a large international corporation began using
a balanced approach to performance measurement in 1994. This
balanced approach allows managers to capture the contributions
that projects at each level of the division make towards specific
divisionwide strategic goals by translating organizational
strategies into specific measurable objectives and linking
project, unit, and organizationwide performance to these
objectives.
Each business unit within the division develops project-based
performance measures that are linked to strategic categories
established at the division level. These categories include:
financial performance, customer satisfaction, internal business
practices, and growth and learning. A manager stressed, however,
that some of the most important measures may be difficult to
quantify. Division and unit managers need to be willing to
discard old measures and develop new ones if the first measures
developed do not adequately measure a particular category.
Project performance measures are used to develop business unit
performance measures and goals. Based on negotiations with the
executive leadership team of the division, each unit's measures
and goals are generally aligned with those of all of the other
units using what is called a "scorecard"; however, each unit may
customize its scorecard so that it is meaningful for the
individual unit employee. These scorecards have a direct link
with compensation and are tied to the contributions of individual
employees or employee teams. (See figure V.2 for an illustration
of the balanced approach.) Unit scores are rolled up into a
divisionwide scorecard that gauges division performance. The
division scorecard is used to determine if the division is meeting
its objectives, which are linked to overall strategic goals. If
the division is not meeting its objectives, the scorecard allows
division management to determine which units within the division
are not meeting their unit-specific objectives and in which
categories. The unit scorecard then allows the units to identify
which projects are not meeting their targets.
Managers stated that the use of a balanced approach has turned
their division around. In 1992, the year in which it instituted
the scorecard, the division was a money loser. By 1996, the
division was making money, which was attributed directly to the
use of a balanced approach. The balanced approach identifies
problems, which permits the division and/or the unit to refine and
improve specific areas or projects. And, because outcomes are
linked to compensation, it also provides direct incentives to
employees to improve performance.
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Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Figure V.2: Using a Balanced Scorecard
Financial perspective - 35%
Internal business perspective - 30% Return on capital employed
Cash flow Lowest growth
Inventory management Improve hardware performance Delight the
customer
Organizational involvement Core competencies & skills Strategic
information access
Learning and growth perspective - 20%
Customer perspective - 15%
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 65
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Figure V.3 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 shown 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.
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Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Figure V.3: Linking Performance Measures to Strategies and Goals
Costs and milestones
Key performance indicators Goal/ vision Become the world's largest
merchant marketer of product A,
while remaining the lowest cost producer
Key strategies Grow product A production capacity
Develop/commercialize new technologies
Tactics/ major action steps
Construct product A facilities at site 1 and site 2 using new
technology Identify possible capacity expansions at other company
sites, rank and begin pre-engineering
Develop external joint venture production Investigate potential
for combining company's product A technologies with other
technologies
Business plan
Actual project costs and schedules are ranked and compared to
planned costs and schedules$ Grow product A production capacity
1996 1997 1998 1999 2000
Plans approved
Site 1 on-line
Site 2 on-line
$ $ $ Strategies
Selective overall performance measures
Strategies Grow product A production
capacity
'94 '95 '96 '970 500 1000 1500 2000
Ca pac
ity
Time
Milestones
Ma rke t sh
are
'94 '95 '96 '97 0
3%
10
15 20%
'98 '05 4%4% 5%
12%
5
Become the world's largest merchant marketer of product A, while
remaining the lowest cost producer
Goal
Time
Time
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 67
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
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 we studied requires that
its Office of Facilities Planning conduct a formal postcompletion
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 postcompletion audits are surveys that focus
primarily on customer satisfaction. One private sector company we
studied 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 we
studied 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: Evaluatethe Decision-Making Process: Reappraiseand
Update to Ensure That Goals Are Met
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. The following case study (figure V.4) describes a state
that revised its capital decision-making process in response to an
internal crisis.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 68
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
Figure V.4: Case Study--Evaluating and Updating the Decision-
Making Process
One state in our study reformed its capital decision-making
process in response to a period of financial crisis. Prior to
this reform, decisionmakers were provided minimal information
about potential and ongoing projects, cost estimates were
unreliable, strategic plans were not in place, and there was no
strict justification process for project selection. There was an
overall consensus that the needs of the state were not being met.
The fiscal crisis provided an impetus to respond. State
legislative and executive leaders formed a capital budget reform
group composed of government representatives and outside groups
with experience in capital planning to research and recommend
changes in the process. The goal of the reform was to enable the
state to make informed investment decisions and to effectively
manage the resulting assets. Specific objectives included
a long-term strategic plan,a constant level of capital investment,
integration of the capital and operating budgets,preservation of
existing assets, and better out-year planning estimates. Since
1994, this state has implemented important changes. The state now
has a 6-year planning horizon and capital plans must be linked to
strategic plans. To introduce discipline to the capital requests,
agencies are required to explain how each request fits in with the
agency strategic plan and to rank individual projects based, in
part, on how much they contribute to meeting strategic goals. The
state has also implemented a performance-based budgeting system,
which integrates strategic planning, performance measurement, and
budgeting. In addition, the state has asked agencies to identify
the operating impact of capital requests over a 6-year period and
has developed an inventory of fixed assets that tracks information
pertaining to location, structural integrity, and the condition of
state-owned assets.
One state government we studied 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 the study 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.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 69
Principle V Evaluate Results and Incorporate Lessons Learned Into
the Decision-Making Process
As stated in Principle I, the Coast Guard is significantly
changing 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 changing 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, as stated earlier, 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. It is too early to evaluate whether the new process
has in fact had these results.
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 70
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 71
Appendix I Major Contributors to This Executive Guide Accounting
andInformation Management Division,Washington, D.C.
Christine Bonham, Assistant Director Hannah Laufe, Evaluator-in-
Charge Trina V. Lewis, Evaluator-in-Charge Sheri Powner, Senior
Evaluator David L. McClure, Associate Director Tomas Ramirez,
Senior Analyst
Seattle Field Office Tuyet-Quan Thai, Senior EvaluatorMargaret
Buddeke, Evaluator
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 72
Appendix I Major Contributors to This Executive Guide
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 73
Appendix I Major Contributors to This Executive Guide
GAO/AIMD-99-32 Leading Practices in Capital Decision-MakingPage 74
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(935275) GAO/AIMD-99-32 Leading Practices in Capital Decision-
MakingPage 76
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