Management Approaches to Resource Allocation

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4. Interview Summaries

The following section summarizes the information collected during the interviews and key findings. For each aspect of this study—planning process and plan content, roles and responsibilities, information systems and performance measurement, and risk management—the relevant aspects of the TB Policy on Investment Planning are described, then compared and contrasted to practices evident in the organizations interviewed. 

4.1. Planning Process and Plan Content

For the purposes of this study, a formal planning process is understood as one that has a planning horizon of a certain distance, with a degree of institutional support or frameworks. Respondents were asked about their prioritization methods, the structure of their planning process, and about the adoption of current methods.

Key Findings:

• Almost all organizations had some type of formal capital planning process instituted in the last five years—evidence of a broad and cross-sectoral trend toward more integrated investment planning.
• Almost all organizations used some sort of priority setting process. Factors influencing prioritization of investment allocations are associated with:
  • Government priorities, risk, program/business requirements, asset conditions, demographics

4.1.1. Federal Government Policy Requirement

Under the Policy on Investment Planning, deputy heads are responsible for ensuring the governance and support of investment planning (policy requirement 6.1.1).

A departmental investment plan is required to have a wide, departmental-, portfolio-, and government-wide perspective and reflect departmental strategic plans and broad strategic objectives of the government. It should be influenced by assessments of investment performance, consider alternative options and delivery models for meeting asset and service requirements spend within departmental reference levels, and take into account the life-cycle cost of assets and acquired services (policy requirement 6.1.2).

The departmental investment plan must be submitted at least every three years (covering a five-year period) to the Treasury Board Secretariat and the decision whether or not to submit to TB for approval is based on a variety of factors including significance, risk, departmental management performance, the magnitude of changes proposed by the plan, and the capacity to deliver said plan (policy requirement 6.1.4).

4.1.2. Summary of Respondents

The following table summarizes the responses of organizations regarding questions on plan content and the planning process, with “plan approval interval” describing the time period between approvals of the plan. “Plan horizon” refers to the years covered in the forward projection of the plan. Further information on these organizations can be found in Appendix A.

Note that federal organizations A, B and C must comply with all TB policies. While Organization D is a federal government agency, it is exempt.

4.1.3. Commonalities and Differences

4.1.3.1. Plan Length

The federal organizations interviewed that must comply with the federal government’s policy requirements (A, B and C) are required to submit a plan every 3 years that covers 5 years of expenditures.

Practices relating to the length of planning cycles revealed slightly different approaches to timing, with plans being renewed by all respondents’ organizations on an annual or three-year basis. Planning horizons were set predominantly at five to ten years. One of the financial institutions interviewed, Organization L, was the notable exception in that it planned investments with a horizon of one to three years.

Though a period of 3-7 years is usual (Kaganova, 2011), Organization D’s representative mentioned that there were initial reservations about long-term forecasting. Organization E reported a similar experience in the difficulty predicting projects further ahead than five years. Addressing these concerns during the change management process may be an important step in achieving buy-in from staff and stakeholders.

4.1.3.2. Priority Setting Process

Almost all organizations used some sort of priority setting process. For public sector organizations, the government agenda often drove program priorities while in the private sector specific business requirements drove investment decisions. In the public sector and in private organizations priorities were also set by legislative compliance (i.e. adherence to code requirements) and asset condition. And while private sector and public sector business drivers, performance measures and priorities are different—as are their “fundamentally different management, reporting, and decision-making systems” (McKellar, 2006, p.63) – there appears to be a common approach to ensuring that those making the investment decisions are provided with accurate data, relevant priorities, corporate context and risk to that sound financial decisions can be made that are aligned with corporate strategic objectives.

Though good judgment and common sense remain essential counterparts to priority-setting criteria, as Kaganova (2011) puts it, “carefully prepared criteria will sharpen distinctions among projects, narrow the range of disagreement, provide a basis for discussion, and, hopefully, make the entire process more transparent” (p.33).

Almost every organization that had capital assets also used the outcome of a facility condition assessment to determine the highest needs. Many organizations have committed to a software solution and a methodology that provides an understanding of the state of their physical assets including replacement costs, life cycle analysis, and current and future funding needs. This information is then used to inform either a business case or a determination of priority matched against a fixed funding target.

Priority setting and resource allocation approaches are being used in health care in Canada and other jurisdictions (UK, New Zealand and Australia). Incorporating the economic principles of opportunity costs and marginal analysis, the Program Budget and Marginal Analysis (PBMA) is a tool to aid decision makers in setting priorities in the provision of health services. The aim of PBMA is to help decision makers plan services in the face of limited budgets, by combining information on the costs and health related benefits of services. It represents a practical application of economic principles in setting priorities by using cost effectiveness principles applied through the use of marginal analysis. (Peacock, 1998)

Mitton (2004) notes that “PBMA provides an explicit mechanism for operationalizing the economic principles of opportunity cost and the margin. This approach helps to ensure a transparent priority setting process, allows for stakeholder consultation of allocation recommendations, enables public input to be incorporated and is driven jointly by local opinion and available evidence. Coupling PBMA with an ethical framework to examine the fairness of the process is important in and of itself and also will likely foster buy-in if the process is viewed to be credible.”

Mitton identifies (2011, p.9) the key success factors to a successful PBMA process:

• Buy-in of decision makers to the acceptance of scarcity and the need to assess options for change;
• Strong leadership;
• High level of trust between managers and clinicians (Subject Matter Experts)

4.1.3.3. Scope

Federal organizations A, B and C must comply with the federal government’s policy requirements and thus are required to include their planned expenditures in acquired services however this reporting requirement was not evident in other organizations. It would appear that the federal government is unique in requiring investment plans to include both capital and operating expenditures.

Almost all organizations responded to questions about their capital planning processes, but not all respondents were able to comment on how their operating budgets were planned or allocated. This was in part due to the individuals interviewed and their role—typically in positions of oversight of capital expenditures—and due to the interpretation of the questions asked in the Interview Guide.

For those who did comment on operating budgets, most responded that the operating budget was reviewed annually and it covered acquired services.

One organization indicated that it was dealing with a structural operating deficit and that it was hoping to build a 3-year operational plan. Currently its operating budget is determined on an annual basis.

Organization H was a notable exception as it uses a revenue-driven activity cost model for its entire budget. Every revenue dollar is allocated among the 17 faculties. Since 90% of the revenue comes from tuition and provincial operating grants, the allocation to each faculty is simply based on the revenue they generate through tuition minus a corporate services charge for IT, finance, facilities services, etc.

4.1.3.4. Affordability and Allocation/Re-Allocation

Organizations A, B and C are required to comply with the federal government’s policy requirements and thus submit an investment plan that is within their appropriated budgets (reference levels). This is in common with many of the other organizations who planned within a defined spending envelope or allocation.

Organizations reported that resource re-allocation decisions were better informed with a formal planning process, in the sense that if a new requirement is identified; processes are in place to allow for emerging priorities. Organization A reported that because the process looks not just at next year’s needs for a particular requirement, but at the whole life cycle cost, it results in a plan that is much better-integrated as it is linked to the HR, IT, and procurement needs. 

Another federal organization (C) noted that if something new came up, there were processes in place to allow for emerging priorities. Part of their process allows for items to be added to the plan mid-year. This is valuable as the nature of capital procurement is that projects will slip from one year to another.

Educational institutions that were contacted in the study reported that funding from the government (and—in the case of the university—from large donors) would be aligned with government or other external priorities and its expenditure would have to be allocated accordingly. Organization J described an approach for generating its own capital funding through real estate investment which it could allocate unilaterally. This practice is described in greater detail in Section 7.1.

Organization H, among others, commented that integrated investment planning is more transparent in that participants can all understand where revenue comes from and where costs are. The process becomes more data-driven as a result of the explicit availability of this level of information about other programs, branches or lines of business.

Craig Mitton notes that international experiences have highlighted the central role of an advisory panel in setting priorities. Its role is to make better recommendations for reallocating resources to better meet organizational objectives. Without this, organizations can’t reallocate resources. “Proactive resource management requires the continual assessment of existing services vis-à-vis new investment options and where the relative value of the latter outweighs the former resources should be shifted accordingly” (Mitton, 2011, p.10).

4.2. Roles and Responsibilities

Organizations were asked about responsibility for investment planning decisions and about the governance processes in place to support formal investment planning.

Key Findings:

• Accountability for investment decisions (both the plan and the process) resided with the most senior person in the respondent organizations.
• Elected officials in public sector organizations were responsible for the approval of the plan.
• Board of Directors and/or Senior Vice Presidents were responsible for approving investment decisions in private sector (depending on the size and complexity of the investment decision).

4.2.1. Federal Government Policy Requirement

It is a requirement of the Treasury Board Policy on Investment Planning that deputy heads ensure that an investment planning process is in place. As well, there is a requirement that key federal stakeholders—including, but not limited to: central agencies, relevant socio-economic departments and common service providers—are informed of the department's planned investments (policy requirements 6.1.1 and 6.1.8).

4.2.2. Summary of Respondents

The following table outlines the various roles and responsibilities for investment planning in the organizations interviewed.

*The TB Policy on Investment Planning section 6.1.4 states that “If requested by TBS, the plan is to be submitted to Treasury Board Ministers for approval”.

4.2.3. Commonalities and Differences

4.2.3.1. Plan Approvals

In general the most senior person in the organizations interviewed was accountable for investment decisions, whether it was approving the process or the plan itself. In the case of public sector organizations, the approval of the plan was generally done by elected officials. In private sector, this responsibility often resided with the business line senior Vice President.

The federal government approach distinguishes between the approval of the plan and the approval of the planning process. While the deputy is accountable for the investment plan, the intent is for TB—as the management board for the Government of Canada—to approve the management practices that led to the plan, not the plan itself.

Almost all organizations reported the creation of senior level and working level committees whose role was more strategic in terms of aligning investment decisions to business strategy/program delivery. This in turn strengthened governance in terms of oversight of all investments.

The role of the business case was discussed among the respondents. Many noted that because of the formal planning process, project proponents are now required to provide more robust business cases and to be more disciplined in their requests. 

4.2.3.2. Plan Champion

For many organizations, the plan’s champion resided in the Corporate Services/Finance/Administration branches. For organizations whose asset base was primarily real estate based, the capital plan was produced by the real estate branch.

The role of the CFO varied among the respondents. Although the CFO played a key role in participating in the senior recommending committee, the CFO did not universally “sign off” on the plan. The CFO’s office played a challenge role, providing funding constraints and funding priorities. 

4.2.3.3. Stakeholder Engagement

Organizations followed similar processes in which formal technical input (often in working groups established for the purpose of the plan) was gathered according to the organization’s program areas and priorities. These were then consolidated into an overall plan that was vetted by a senior level committee that had broad representation across the organization. The senior level committee then recommended the plan to the organization’s head.

Peacock notes that stakeholders may include “those directly involved in the programmes being considered and those indirectly involved (collaboratoring providers, policy makers, finance and information staff, and community representatives)” (Peacock, 2006, p. 483).

The federal government requires that departments actively involve relevant stakeholders in other departments to improve investment planning across the broader government enterprise. 

4.3. Information Systems & Performance Measurement

Respondents were asked what information systems and technology they have in place to track asset and departmental performance in support of planning and resource allocation processes.

Key Findings:

• Prevalent use of spreadsheets and databases to prepare and monitor the capital planning process: no COTS or enterprise solution in use.
• There were a variety of metrics used to measure both corporate (program/business objectives) and operational performance (project or asset specific) but only the federal government appears to measure the performance of the investment planning process itself.
• With the exception of the federal government respondents (which did not report on specific software), most other organizations have committed to a software solution and a methodology (e.g. building condition assessment or facility condition index) that provides an understanding of the state of their physical assets including replacement costs, life cycle analysis, and funding needs.

4.3.1. Federal Government Policy Requirement

The Policy on Investment Planning requires that information systems are in place to support planning, budgeting and accounting for resource allocation, and enable performance measurement and reporting related to the management of departmental investments (policy requirement 6.1.3). Within the context of the policy there is a requirement for departments to evaluate, monitor and document the investment planning process and its results.

4.3.2. Summary of Respondents

The following table illustrates the variety of information systems and tools that the organizations reported that they were using to support planning, asset and project management. Note that it is not a complete inventory and does not include all their information systems.

4.3.3. Commonalities and Differences

4.3.3.1. Information Systems

Respondents from federal organizations each reported that an information system was in place, but that the specifics of each system differed. Organization A is in the process of developing an integrated ERP for all expenditures; Organizations B and D each use SAP-based systems for project management. Organization C uses an Oracle-based tracking system for asset conditions and management.

Common to almost all the respondent organizations was the use of spreadsheets and databases to prepare and monitor the capital planning process. Only Organization A was investing in an ERP customization project to meets its reporting requirements.

Organization K commented on the historic nature of its information systems indicating that the systems have been a patchwork of disparate, home-grown systems with poor reporting capabilities and data quality issues. It has just undertaken an initiative to improve the architecture and design of their systems and has invested in a capital planning/building condition assessment tool.

4.3.3.2. Key Performance Indicators

The responses to the Interview Guide question regarding the type of key performance indicators demonstrated that there were a variety of metrics used to measure both corporate (program/business objectives) and operational performance (project or asset specific).

All three federal government respondents described the use of a performance measurement framework focused on projects and assets.

Examples of corporate key performance indicators (KPIs) were crime rate, hospital waiting times, faculty success, publication of research, research funding, sales/store, costs/store.

Example of operational KPIs were project-based (scope, schedule, budget, accuracy, close out, compliance); asset-based (age, maintenance, downtime); space-based (gross sq. ft./student) and environmental (energy use per sq. ft./GHG emissions, energy use/store).

4.3.3.3. Performance Measurement

Federal government organizations are required to measure the performance of the investment planning process.  For example, the Guide to Investment Planning – Assets and Acquired Services, section 3.2.3 sets the expectation for the departmental investment plans to:

• Describe the performance management approach used for the investment planning process and for the asset and contract management regimes (based on other TB policies)
• Describe key performance indicators
• Describe the investment control, monitoring and evaluation processes
• Demonstrate how continuous improvement is used to leverage lessons learned into the future investment planning cycles.

This expectation appears to be unique to the federal government.

In terms of tracking asset condition, with the exception of the federal government respondents, most of the organizations have committed to a software solution and a methodology (building condition assessment of facility condition index) that provides an understanding of the state of their physical assets including replacement costs, life cycle analysis, and funding needs. While federal government departments and agencies are required to track real property asset performance against functionality, utilization, physical performance and compliance as per the Policy on Management of Real Property^{See footnote [4]}, they did not report on the use of specific software solutions.

The financial and retail organizations reported that they track operational metrics such as energy usage, space utilization and costs metrics (costs per sq. ft., costs per FTE) in addition to building condition assessment data.

4.4. Risk Management Approach

This section deals with the inclusion of risk in the planning and resource allocation process and the communication of key asset risks to individuals responsible for decision-making. 

Key Findings:

• Almost all organizations integrate risk management at some level of their investment planning process;
• Project Risk and Complexity tools are not unique to the federal government – similar practices exist in the UK and Australia.

4.4.1. Federal Government Policy Requirement

The Policy on Investment Planning – Assets and Acquired Servicers requires that departmental investment plans comply with the Standard for Organizational Project Management Capacity and the Standard for Project Complexity and Risk. These standards describe the process used to assess the department’s project management capacity as well assessing the level or risk and complexity of projects. This information is captured in the departmental investment plan.

The level of risk and complexity of the departmental portfolio of planned projects are a factor in TBS’ evaluation of departmental investment plans.

4.4.2. Commonalities and Differences

4.4.2.1. Project Risk Management

At the project level, risk analysis and mitigation is an integral element of the project management process for almost every organization interviewed. Risk is communicated specifically for each project or in the business case that is seeking funding for a project.

 For federal government departments, all projects must be assessed to determine the level of complexity and risk before project funds are expended, to determine project approval authority. The Project Complexity and Risk Assessment (PCRA) tool was developed that includes 64 assessment criteria organized into 7 categories: project characteristics, strategic management, procurement, human resources, business, project management integration, and project requirements.

One provincial organization indicated that it was developing a “risk screen” – a tool that will identify what projects are high risk and need to go to Ministers for review. If the project has a low risk, then the project can be signed off by the Project Board or the ministry’s deputy head.

Educational services organizations, in addition to managing risk on their capital projects, need to analyze the risk associated with their funding levels. For example, international students generate significant revenue– but their demand can fluctuate depending on market conditions.

Internationally, approvals linked to project risk profiles have been in practice in both the UK and Australia.

In the UK, all acquisition and procurement projects are subject to the Gateway Review Process. A Risk Profile Assessment, not unlike the Project Complexity and Risk Assessment (PCRA), is conducted for each project to determine its level of risk being high, medium or low before a Gateway Review Process is tailored to provide oversight reflecting the corresponding risk level during the project implementation life cycle. For projects classified as low risk, departments may decide that a Review is not needed. This decision must be made on the basis of a full understanding of the implications and departments must be accountable for their action.

In Australia, once a project meets certain financial thresholds, the risk level is determined using the Gateway Assessment Tool and oversight process of the project implementation is tailored to reflect the assessed risk level. The risk threshold for entry to the Gateway Review Process is High Risk and projects assessed as High Risk must move sequentially through the full Gateway Review phases throughout the project’s full life cycle.

4.4.2.2. Plan Risk Management

Risk-based approaches to investment plan priority-setting were more prevalent in government departments and agencies and in the municipal and educational organizations.

Federal government organizations (A, B, C and D) described risk—both project-based and departmental—as integral parts of the investment planning process. This is the result of the policy requirement to evaluate risk using the PCRA prior to plan approval.

Organization C made particular note that investment plans also communicated the consequences of not proceeding with an investment; because of this, approval of the plan also means explicit approval of that which is not being funded.

Organization D noted that risk was integrated into all their processes for investment planning, oversight and methodology and that their Chief Risk Officer was a member of the Resource and Investment Management Committee.

 Outside of the federal government risk management practices are more commonly carried out at the project level or the corporate level (corporate risk profile).

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