Managing Risk through the Facility Portfolio: Identifying Risk

This is the first post in a two-part series. Click here to read the second post, “Managing Risk through the Facility Portfolio: Risk Mitigation.”

Risk is inherent in any organizational effort, whether that organization is a commercial business, a hospital, a school or a government entity.

While organizations invest tremendous time, energy and money in trying to manage many aspects of risk, they often underinvest in one more area: their facilities. Many organizations are now using a “risk-based” approach to infrastructure management to help them answer these questions:

1. Where is the greatest risk within the portfolio, both today and in the future?
2. What projects should be the highest priority to address the risk, given limited capital dollars?
3. How can these necessary expenditures be justified to management?

Identifying and Managing the Potential Risks of Facility Condition

Why do otherwise well-run organizations fail to factor risk into a facility capital planning and management program? For one, there is usually no “standard” approach or method to quantifying risk – no accepted metrics, processes or programs. They lack a method to combine risk analysis with other facility-related elements (condition, functional adequacy, etc.). And perhaps most significantly, they lack tools and training.

A wide variety of risks exist within most building portfolios, including life and safety issues; compliance with codes, mandates and regulations; environmental hazards; natural disasters; and the potential exposure of an organization’s image, brand and reputation. The financial impact of any of these risks can be severe, ranging from loss of business continuity, to hefty fines for non-compliance and lawsuits, to the high cost of emergency repairs and unplanned projects. It’s important to identify these risks and quantify them in order to make intelligent decisions and develop capital plans that can protect organizations from unforeseen events and diminish risk overall.

It is crucial to identify the specific risks the organization faces in terms of its facilities and the importance of each. Life and safety issues are always important to any organization, but they may be even more so in a facility that caters to the public. The type of facility affects the level of risk; for example, within a healthcare system, the failure of an emergency clinic is more crucial than the failure of an office building for an office building and, for a university, the failure of classroom buildings most likely has a greater impact than the failure of administration buildings.

Every organization has a unique definition of facility risk. Facility teams need to work with departments across the organization to understand what facilities and systems are most critical in support of the organizational mission and its specific objectives. Knowledge is power, and identifying and quantifying risk will benefit any facility management team by providing the first defense against the worst of the unplanned. Emergencies will occur; organizations that plan appropriately will most quickly recover at lower cost.

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The Facility Risk Index: An Actionable Metric

Many organizations want to do more than identify their facility risk – they want to be able to measure the risk of failure so that it can be minimized by addressing deferred maintenance and conducting proactive maintenance. While the data from a facility condition assessment can be used in a basic prioritization scenario, the risk index is an asset metric that can take into account multiple considerations, and combines system criticality and facility condition to present a more accurate measurement of risk. The risk index provides an objective view into facility risk and builds a solid case for funding capital projects.

The risk index process has three primary steps:

1. Create Risk Templates

The first step in the process is to create building models, known as templates, for all building types and then break them into major systems. Organizations can define various risk factors, such as criticality and impact on operation, and each system in a building should be rated on these risk factors, The model can be used to examine the risk today versus five and 10 years forward,. The model can then be applied across the organization’s facility portfolio. The risk profile of individual buildings can be adjusted by the purpose of the building and other variables.

As part of the process, weightings need to be defined to understand the relative impact of each risk factor (e.g., applying a weighting factor to see the level of criticality for each building). You might rate a prime system that provides critical support and needs immediate renewal a 1.75; a system that provides functional non-critical support with renewal needs 10 years in the future, a .5.

2. Calculate Risk Index

The risk index includes deferred maintenance requirements linked to the area of risk (generally identified during a facility condition assessment) and a system criticality/risk factor.

The cost of project requirements as defined during a facility condition assessment is multiplied by the risk factor and then divided by the estimated replacement value for that system or facility. The index is calculated for each system as well as the whole facility. Three risk indices are calculated for the current situation, as well as for five and 10 years ahead.

3. Demonstrate Impact of Risk

Once risk is identified, addressing critical issues prior to failure is vitally important. With projects prioritized and the risk index in place, facility managers can justify both short- and long-term budget requirements by demonstrating the impact of different funding levels on the risk of an individual facility or the entire portfolio. Using “what if” funding scenarios, organizations can pinpoint the risks and highlight the financial consequences if the work is not completed.

This article originally ran in the January/February 2015 issue of FMJ, the official magazine of the International Facility Management Association. For more information on FMJ, visit www.ifma.org/fmj.