November 30, 1996 - From the November, 1996 issue

Asset Management: Public Sector Challenges & Future Opportunities

By Patricia Flynn, principal of The Maxima Group, a real estate and asset management consulting firm in downtown Los Angeles. She has consulted on asset management assignments for both public and private-sector clients, including Fortune 500 companies, the State of California, The City of Los Angeles, and the County of Los Angeles. 


Patricia Flynn: “The State… was able to consolidate its occupancy and reduce overall occupancy costs by as much as 20 percent by using two principles well known in the private sector: consolidation eliminates duplicated common areas, and large space users have more negotiating leverage.”

During the late 1980s and early 1990s public agencies began to catch onto an idea that had already taken root in the private sector: effective business practices require management of the balance sheet, not the income statement. In the case of the private sector, a wave of merger and acquisition activity pointed out that the sum of the values of individual assets could be more than the balance sheet value of debt plus equity. Many companies were acquired based on some variation of balance sheet equity, then savvy investors sold individual assets at their market value generating huge returns on their original investment. 

The public sector, however, has different goals and objectives than the private sector. While corporations can focus on maximizing profits, public agencies have a more complex public service mission. The challenge of asset management for the public sector is to provide needed services with ever-shrinking resources.

Accountability also differs between public and private entities. Private companies are continually forced to reevaluate and improve their business practices or face the consequences of angry shareholders and/or hostile takeovers. The public sector may generate angry words from elected officials and reports from special task forces, but the formal mechanism for ongoing accountability is simply not there. 

The first wave of asset management focused on real estate assets. Shrinking tax revenues and increasing demands for services drove a wave of public sector cost containment which included strategies for lowering real estate occupancy costs. Everyone (including the private sector) began to realize that real estate costs were usually second only to personnel costs in most organizations, and that effective management was essential to streamlining operations. 

The task of real estate asset management began with comprehensive inventories of leased and owned assets and the centralization of real estate management within each public agency. This effort yielded real results. The State of California was able to consolidate its occupancy and reduce overall occupancy costs by as much as 20 percent using two principles well known in the private sector: consolidation eliminates duplicated common areas, and large space users have more negotiating leverage. 

But the next wave in asset management is more complex than simple cost containment and holds the potential for much more rewarding results. Three characteristics distinguish the next wave of asset management activities: 

  1. a comprehensive approach to the evaluation of all assets; 
  2. the use of technology in the fulfillment of the public mission; and 
  3. the improvement of business practices to put the public agencies on an even footing with the private sector. 

A comprehensive approach to asset management recognizes that the concept of asset management will broaden to encompass all public assets, not just real estate. Real estate asset management can reduce the cost of occupancy by maximizing the physical use of the space and making sure that lease rates and/or acquisition costs are consistent with market prices. Comprehensive asset management takes this several steps further by evaluating the underlying activity that is supported by the real estate asset. 

The difference between real estate and comprehensive asset management can be illustrated by using the example of fleet maintenance. Current estimates of total public sector fleet in downtown Los Angeles top more than 30,000 vehicles, with eleven separate vehicle maintenance facilities. Clearly, this is an opportunity for increased efficiency.

The real estate asset management approach evaluates the locations in which fleet maintenance is being performed and asks:

  • Can this activity be centralized?
  • Can we make more efficient use of existing facilities?
  • Should these facilities be leased or owned?

Typically this analysis is done on an agency-by agency basis, with each agency responding to its unique mission and circumstances. 

Comprehensive asset management asks harder questions such as:

  • Why do we have a fleet?
  • Why are we in the vehicle maintenance business?
  • If we have vehicles, should they be owned or leased? 
  • Are our costs and service levels in line with what is available in the private sector?
  • Can we share facilities with other agencies?

There is a growing sentiment that any government-provided services that can be found in the Yellow Pages should be considered for outsourcing. 

Advertisement

The questions asked in the comprehensive asset management approach are complex and often go unasked because of the lack of basic information (e.g., how well utilized are our vehicle maintenance facilities?) and the absence of a structured approach to evaluating the alternatives. Traditionally the subject of a series of outside consulting reports, asset management decisions need to become an institutionalized part of public management. 

The most effective evaluation tool is a cost/benefit analysis comparing each of the potential asset management strategies. This allows decision makers to compare potential cost savings against qualitative issues and arrive at informed decisions. The right decision is often a compromise between conflicting public sector goals.

A comprehensive approach to asset management also requires some creative thinking and approaches. For example, it may be possible to generate additional income from concurrent use of existing assets. Metropolitan Water District (MWD) is making selected sites available for film locations when filming activity has no negative impact on operations. Several agencies are identifying sites which can support telecommunications infrastructure to support the new short wave technology. These cell sites can be leased to operators with virtually no capital investment, risk, or operating interference for the agencies. 

The use of technology holds tremendous promise for more efficient asset management and better service to constituents. Simple database tools are in place to allow asset managers to track their leased and owned assets for more efficient planning. The next wave of technology tools include facility management software that both tracks and plans more efficient physical use of administrative space. More efficient cost accounting systems will allow public agencies to quantify their cost of occupancy and measure progress as various strategics are implemented. 

The first wave of technology in asset management was focused on inventorying all owned and leased assets. The next wave of technology will allow for this information to be used to plan strategies and make better decisions. 

The County of Los Angeles, for example, has just matched its real estate inventory with a County-wide mapping effort conducted by the Assessor’s Office. This is the first time it is possible to see a geographic representation of all property under the jurisdiction of the Board of Supervisors, including property controlled by the CAO, Public Works, Sanitation Districts, etc. The County is in the process of adding agency service areas, and the mapping software can be used to plan a proactive real estate strategy rather than react to individual departmental needs as requested. 

Geographic information systems (GIS) allow managers to see the locational relationships between both other facilities and service areas. If government agencies started to compare their services and service areas the result could be the creation of service centers where the public could go to renew a driver’s license, get a building permit, and apply for a passport. Service centers could be provided by consolidating into existing underutilized government facilities or by leasing space in existing retail developments. 

Technology may also allow some services to be provided online. For example, imagine sending your building plans in for review via modem and discussing changes with the plan checker via e-mail. This would save the builder considerable time and reduce both the space and personnel costs associated with conducting all business over the public counter.

Finally, better business practices will help public agencies function more efficiently. Currently the public sector is hampered by regulations which reduce its competitive advantage. For example, sale of an asset by a public agency requires an inflexible process which often takes three to six months. Potential buyers are often worn down by the bureaucracy and simply decline to bid or withdraw their offers. Streamlining this process will allow public agencies to be more responsive to market forces. 

Most public agencies do not offer departments any incentives for working together to reduce occupancy costs. Any cost savings realized disappear into to the General Fund, and cannot be reallocated to upgrade the department's computers, fund special projects, or other departmental use. Similarly, cost savings identified by individuals are often rewarded with a letter of commendation but no financial compensation. The identification and implementation of more effective asset management approaches need to be recognized and rewarded at all levels. 

Comprehensive asset management is not a one-time effort. The tools and techniques used in the decision making process need to be incorporated into the day-to-day management process, and past decisions need to be continually reevaluated. The key to long term effectiveness is a system which measures progress over the status quo and periodically reports back to elected officials. Ultimately, the pressure for change comes from tax­payers who demand that government respond to the same competitive environment as the private sector.

<

Advertisement

© 2022 The Planning Report | David Abel, Publisher, ABL, Inc.