Facilities Operating Cost Cutting Conundrum

Conundrum:  (Oxford Dictionary): a confusing and difficult problem or question
                          (American Heritage Dictionary): a paradoxical, insoluble or difficult
                          problem; a dilemma

Cost management is the process of planning and controlling the budget of a business – in this case the budget for facilities-related capital and operating expenses.  The key understanding why there should be an emphasis on managing, rather than reducing facility-related expenditures, lies in the nature of the cost structure.

The Facilities Operating Cost Conundrum: If you set out to cut Facilities Costs 10% by using a line item budget approach, you will only end up with a 2% reduction.

Here’s why:

Of the eight cost categories developed  by the Building Owners and Managers Association (BOMA), three are typically not under the direct control of the Facilities organization, and reductions in two other categories could result in damage to the physical property or occupants.  That leaves three out of eight categories for line item budget cost cutting – and arbitrary cuts in these areas can hurt your business and drive future cost increases.

For example:

When targeting facility costs for an overall 10% reduction in a 4,500 sq. ft. branch bank, items highlighted in yellow actually increase or remain the same because they are not under the control of the Facilities Department (Property Tax, Insurance and Depreciation), because the rates increase (Utilities), or because the cost is a pro-rated portion of a multi-site, bare-bones contract (Security).

For the three line items that can be reduced consider the following:

• When Cleaning cost reductions result in increased periods between trash collection, insects and rodents may appear – resulting in additional pest control costs. In the case of rodents, damage to the building, and possibly damage to your reputation can result when customers spot insects or rodents in the lobby of your financial institution.
• Cuts in Maintenance, like ignoring a leaking gutter, can result in water damage to the building and possibly a mold remediation bill – both payable at a future, unknown date as an emergency expenditure.
• Cuts in Administrative staff are only possible by reducing your in-house staff’s salary or laying off employees. These are the people thinking up ways to save money or avoid future costs.  Effective cost management strategies don’t materialize out of thin air – unless you are one of the folks with a line item mentality.

What should the prudent executive do?