Using Operational Data to Construct a Strategic Plan for your Facility
Grab something to eat and get ready to gobble up knowledge with Mark Mochel as he gives an ASHE Lunch & Learn presentation about 1+1=3: Using Operational Data to Construct a Strategic Plan for your Facility.
Well, everyone. And welcome. My name is Regina Cosentino, and I will be today's moderator. Welcome to Ashley's webinar. One plus one equals three. Using operational data to construct a strategic plan for your facility presented by Brightly. Thank you so much for joining. Before we get started, I'd like to go over some housekeeping rules. This presentation is being recorded and it will be available on demand after the webinar and you'll be notified via email once it's ready.
We also invite you to participate and ask questions via the Q&A window. We'll answer your questions at the end of the presentation. I like now to introduce Speaker Mark, my local strategic account executive at Brighton Software, A Siemens Company. Mark will lead us today and we'll take a deeper dive into the key performance metrics and how we can leverage operational data to support a more strategic view of infrastructure investment.
I now pass it over to you. Thank you. Thank you, Regina. I appreciate the introduction. I appreciate everybody joining today. Understand that everybody is very, very busy these days. We all have a lot on your plate. So having a few minutes to spend with you today to talk about strategic infrastructure investment. I very much appreciate that. As you can see on the screen, I like to start off this conversation usually with the question to to the audience is, does everybody know what this machine is?
The answer is this is the first MRI machine in 1977. Dr. Doumanian on the left successfully did the first complete body scan. And one answer to this question in the past was it's a medieval torture device. Not true. It's a piece of clinical equipment from the seventies. But I always start off the conversation because when we talk about aging infrastructure and we talk about strategic planning for the facility, I like to remind everybody that in every other technology space, whether it's information technology, the automotive industry, clinical engineering, computing, we have the concept of of planned obsolescence.
It's normal for us to invest in new technology. Now, we would never use this piece of clinical equipment today, but as many of the folks on the call know, we have infrastructure equipment in our hospitals today. In some cases, that's much older than this. So I hope that sets the stage for changing the culture, changing the way we think about infrastructure investment.
In terms of an agenda. There's four sections of the presentation. I won't go through all of the details here, but I do want to set the stage and talk a little bit about the macroeconomics that we're seeing in health care today. I'm going to bring back a presentation that some of you may have seen. We're going to talk about buckets.
We're going to talk about understanding the cost buckets. It's not going to be the same presentation that you might have seen in the past. But I do want to reference some key elements and how we use that data to build a strategic investment plan. By the numbers, we're going to talk a little bit about the relationship between operational budgets and capital budgets.
And then transformation. How do we take this forward with with our leadership? And my name is Mark Moko. All of my contact information is available in the presentation, which will be shared with you with brightly software a Siemens company. Some of you may know me from the past. I was part of the facility Health Incorporated organization and development of the Origin Strategic Asset Management Platform.
So Strategic Asset Management, what is it? I think it's very important to define this concept. It's the management of the maintenance. This is my favorite definition. And what's important about this, as I say, often managing a facility is different than maintaining a facility. And oftentimes, even within ASHE and within all of our membership, we were so over burdened with the technical requirements of maintaining the building, maintaining the environment of care, handling all of the compliance issues.
It's hard sometimes to step back and realize there's a management element, there's budgeting, there's forecasting, there's strategic relationships that we need to develop with the C-suite. And for that reason, we talk about this as a people process and technology. It's not just software. It's not just process. It involves cultural elements. How do we want to manage the facility going forward?
Some of you may know this is enterprise asset management. In my mind, they're very much interchangeable. But both speak to the strategic nature of what we're trying to accomplish here in terms of of maturity. How do we how do we eat this elephant? I love this concept of the hierarchy of maturity. And for those of you that are have had any psychology, sociology type training or you're into that kind of thing, Maslow developed what's called the hierarchy of needs for people.
And it starts with food and shelter, and it goes all the way up to self-fulfillment. And the hierarchy of needs suggests that we can't be fulfilled as human beings if we're tired and hungry and we don't have shelter. And so if we apply that same type of maturity scale to asset management, we start first at that foundational level.
Do we have a basic understanding of what assets are in our building? Are we managing the building? Are we compliant with accreditation requirements? And then we, you know, if we have that basic blocking and tackling in place, then are we focused on productivity? Do we know where we can gain efficiencies and how we can perform better? And then we look at benchmarking.
How do we compare to other hospitals in our health systems? How does our health system compare to other hospitals? You know, maybe in the country or health systems. And then we talk about prioritization. Do we have enough data now that we can prioritize investments proactively in terms of risk? How do we mitigate risk to the facility? We can't fix everything.
There's not enough money to do everything that we want. But how can we engage our leadership leading up to then strategic asset management, maximum performance? We know what our energy consumption is. We know what we need to do to decarbonize. We have optimized capital planning processes. All of these definitions on the right, that's our vision. That's where we want to be.
This hierarchy of maturity helps us to understand how do we get there? How do we go from being reactive to preventative to proactive and predictive in how we manage our facilities? As many of you have heard, we talked about brightly as a software company. We are part of the Siemens family. And just to talk about that vision, everybody knows or I think many people know Siemens has a lot of technology solutions building automation, building management, security, fire alarm and so on and so forth.
Ultimately, we want to connect all the way up to and including that that data that's available through those advanced systems. So that helps you understand our relationship from a brief introduction of brightly who are we? What are we? Do we really have two different technology suites that we bring to the market. The first is called the Works Hub, and that is our computerized maintenance management system that's been specifically designed for the health care environment, meaning it's constructed to deal with the compliance elements that we all know are unique to the health care environment.
That is our baseline solution that's going to fulfill those foundational needs that we talked about. It's the day to day heartbeat of the facility, making sure we're doing our work. Orders are preventive maintenance are rounding all of the inspection, testing and maintenance that's required to run these hospitals and stay within status through accreditation. The second platform, excuse me, and really the focus of this presentation is called Origin.
This is a think of it as a Fitbit that sits on top of the CMA. This is the strategic planning data and we're focused on mitigating risk. How much deferred maintenance do we have? How much capital should we be investing in the facility, how much preventive maintenance should we be doing? How is that affecting the lifecycle of our equipment?
This is that that medium layer that that replaces the spreadsheets. For those of you that are excuse me, using SharePoint or using spreadsheets to manage your capital planning, origin is a solution that fills that void. When we put these two together, that's the one plus one equals three. Now, it is important to note we're talking here about the work side, which is our CMM system origin as a strategic asset management platform can interface with any CMS.
So the point I want to make here, the foundational elements, the day to day management of the facility, the asset inventory, all of those things, it's important regardless of what solution you're using from a CRM OMS perspective. So I would encourage you though, to look at those foundational elements. Do you know what you have in the building today and can you see how you're performing in that day to day maintenance and management origin that is going to bring that strategic intelligence?
So that's the one plus one equals three. And we'll dive into a little bit of data here. What we're seeing now on a national level for all of the sites that we've surveyed and we're looking at close to a hundred million square feet of space and over 117,000 major mechanical, electrical, plumbing assets. And what our data is showing is that about 46% of those assets are in deferred status.
Now, what does that mean? Deferred status means those assets have exceeded industry expected useful life and should be considered for replacement. Now, not all of those assets are in immediate failure mode. In fact, some of them maybe are performing quite well because they've been well maintained. Maybe there's been some significant capital investment made to keep those assets current.
You know, it's an air handler with a new coil, a new fan wall, those types of things. But the point is, we want to isolate and understand what is the overall age and condition of the building and how do we track that? What's important to note here is this average in our database was about 41% on the front end of COVID.
So we are seeing an uptick and an increase in the age of plan or the deferred maintenance levels across the country. What this allows us to do. One final point before we go to the next slide. If you look in the middle of the screen, what it allows us to do is to create a trajectory over the next ten years as a as an average, what type of investment should we be making and how will that affect the level of deferred maintenance?
And you see here is an average. It can be anywhere from, say, three, 350, a square foot up to six or $7 a square foot. We can use that information to create a strategic level investment or at least to empower strategic level investment discussions with the C-suite. This is an example of a customer. This is not a real customer location in name, but we have we have created a database with some real customer data.
Just want to maintain confidentiality. Of course, of those sites. So please don't don't take the map is directing you in the right direction. But what this shows is for a typical seven hospitals system, we're seeing about 3.3 million square feet, about 1700 major capital assets. But in this case, through this system, 65% of those assets are in deferred status.
What that tells me in looking at the data, this is an organization that has historically lacked the ability or maybe lacked the processes to sufficiently invest in that infrastructure over time. The point being that every hospital has its own fingerprint, it has its own location, its own size, its own culture. But when we look at it this way, we can actually start to identify, you know, good, bad or best, if you will.
And we can also see areas of improvement. And what's important I won't show you here is when we dive down, we look at each site. We can actually compare hospital one to hospital two and so on and so forth, so forth. The point here is to create that more collaborative engagement with the leadership and use the data to guide the discussion versus subjective opinion.
So setting the stage in terms of the financial situation very quickly, what is infrastructure? In this case, we're focusing on repair and replacement utility infrastructure. So it's going to be the major mechanical, electrical, plumbing, the life safety elements. We do look at the building facade, glazing and roofing. We consider those to be infrastructure assets, civil engineering assets, structural steel, parking garages, those types of things.
Very important from a capital planning perspective, but those are usually tracked as separate building projects. So what the data that we're showing here, we're really focusing on all the stuff that's bolted to the structure. It's the pumps, it's the heat exchangers, the air handlers, all of the equipment that makes the facility function. But when you talk with, you see, fine, what do you mean by infrastructure?
So that you're you're using the same language, if you will, when you talk about investment needs. So very quickly, from a historical perspective, some of you may have seen this and other presenters prior to COVID as she did some studies and they published information. This is back in 2017. The data is valid through, say, 2015. I know that's ancient history in some regards, but what's important to note here is that in the 20 years preceding the COVID pandemic, we were already seeing trends showing a relative lack of investment in infrastructure.
Now, there's lots of reasons organizations didn't have the money. Organizations didn't understand the needs. The buildings are just getting older, whatever you might want to say. Before COVID, we were on that that trajectory based on data I pulled from Becker's hospital review just in the last couple of days. The current average age of plant now is trending close to 12 years.
So if you compare that to the actual data above, we were at about 10.5 to 10.75, say five years ago. What this is telling us is we are continuing to age the infrastructures, continuing to age. For those of you unfamiliar with the age of plant statistics, it's a simple financial analysis. It's it's the value of the equipment that's in deferred status, meaning it's it's been written off financially, if you will.
It's been depreciated financially, but it still sits in the building. So it's the ratio of how many assets are sitting in the building today that have already been fully financially depreciated. But we're still physically using them. So this just tells us we have more and more equipment in the facility that's exceeded its expected useful life and it's exceeded its financial depreciation as well.
So that's one significant data point. The impact of the COVID pandemic is real. We're all seeing it financially. Speaking of that, when we look at the macroeconomic trends, I monitor the cost of an all flash report. For those of you that don't don't know about that, it's a publicly available report. It's a publication about the financial status of the health care industry and what the data is showing is we're starting to see a little bit of improved performance in March and April.
Some organizations are reporting fewer losses, if you will, but the overall trend through the pandemic and now post pandemic, everybody's familiar with supply chain issues, everybody's familiar with inflation, all the things that we're dealing with. What this data is suggesting is that we are continuing to run with a high percentage of hospitals and health systems in the country that are reporting negative operating margins.
So that's just significant. I think everybody knows that. But it's important that we keep that in mind when we frame the rest of the conversation. Different reasons, different months. You'll see, you know, you'll see trends in the baseline, the high labor costs of nursing, the long lead times for critical item in specific, you know, electrical breakers. Nobody can seem to find those these days.
There's lots of different things that are impacting us. I think everybody's aware of that. But again, we want to keep that in mind. The third element, which is very, very interesting for those of you that may not be familiar, there's up to 61 hospitals or health systems in the United States that the CEOs have signed decarbonization pledges up to and including the White House decarbonization pledge.
And what these CEOs and CFOs are committing to is a significant reduction in carbon footprint by 2030. Well, those of us in the facilities world know that five years from now is not a long time to make significant changes in infrastructure. I point this out simply to say of this of the systems that have been listed, and I know many of the folks at these groups and are trying to work with them to understand what type of investment is required or would be required to significantly affect energy consumption or reduce carbon footprint.
Those two don't always go hand-in-hand, right? I think a lot of the engineers on the on the call understand that. But no matter what, it's going to take significant capital investment to dramatically change our infrastructure as it is today. So you put all those three things together, historical lack of investment, aging infrastructure, a difficult financial situation for our hospitals and health systems.
Yet we desire to make transformational change in our infrastructure. That's a perfect storm, folks. And so we have to come at this from a new approach and think about how do we build business plans that really document the dollars and cents that are going to come into play here. Shameless plug here. I just published an article in HCM magazine last month.
A lot of the things that we just talked about and that we'll talk about through the rest of this presentation, I've outlined those all here. Ashley, Thank you for giving me the opportunity to publish this information for all of the members here. I would encourage you, that's a free download. Please take a look at this. It's just another way of telling the story that we're talking about today, and I hope you find it helpful.
The conclusions of this front end, it's really three points. The infrastructure has been aging. We know that financial projections suggest it's not going to get any better. It's going to be more difficult to get capital budgets and operational budgets approved, not easier. There is no when we get through this, we'll be back to normal. The new normal is going to be difficult for us all.
So we're looking again at transformational thinking. How do we engage our leadership in a different way? So that leads us to the buckets conversation. I'm going to spend a couple of seconds just making sure you understand the different buckets and how we're looking at those. And then I want to talk about those financial relationships. So couple of years ago, I did a presentation at AC with Matt Steen from Novant, Jonathan Flannery from Ashley, and we introduced this concept of the buckets.
And the important thing that we really want to focus on here is if you look at the middle buckets, the blue buckets, all of the compliance, all of the energy costs, all of the preventive maintenance, whether you're using OEM or APM, general operations, snow removal, there's a long, long list of things that we have to do no matter how many patients are in the building.
So we look at those as non discretionary fixed cost. It's really important to understand how much money out of your budget is committed to these non-discretionary fixed costs. The yellow buckets then focus on the unplanned variable costs, basically break fixed work orders, asset failures. These are things that happen. We have to react to them. You know, if a pump starts leaking, we have to fix it.
If an air handler crashes, we have to fix it. If a boiler goes down on Christmas Eve, we have to fix it. The point of this is it's variable because it depends on the age of the equipment. It depends on how the equipment's being maintained, depends on the our staff's ability to run it efficiently. It depends on a lot of things.
But everybody on this call has seen situations where we have an emergent failure, we have an emergent situation. It's very inefficient spend and it's very, very disruptive to operations, but it is non-discretionary. So it's important again, for us to understand how much we're spending in those buckets. The green buckets then represent what I call the budget battleground. This is everything that's left.
This is the stuff that we would like to do if we had the time and the money and the resources to do it. This is investment in new technology. This is thermo scans for the roof, different reliability centered maintenance things that we can do. This is proactive capital where we are consciously choosing to upgrade or replace assets before they fail because we can do so in an efficient, well coordinated manner.
Oftentimes, though, we negotiate the whole budget, and the point of this here is to highlight that we really want to understand these different buckets. The next bucket that we talk about, and I have mentioned already, how many of our assets are in deferred status, and a lot of folks are hesitant to report this information to the leadership because sometimes there's a fear that it's punitive.
Right. If we have a high number of assets in deferred status, somehow we're not doing our jobs as a facility leader. Couldn't be further from the truth. Communicating deferred maintenance and objectively defining the CET, the status of these systems. That shows that we are managing our facility properly. We know what we need and that sets up, again, a different type of discussion with the leadership.
In summary, as we see more assets in deferred status, I look at it not as deferred maintenance. I actually want to call it deferred investment. This is money that we should have put into the facility in the past. For whatever reason. It wasn't done. So we now track that as a debt. It's a debt that has to be repaid.
You'll never see it on the balance sheet. The CFO isn't tracking it, but we all understand that each time we defer money from the hospital, from the from an air handler, and we go buy an MRI instead, we're actually borrowing from the life of the facility to fund other projects. Eventually, that debt has to be repaid somehow, right?
The relationship then quickly, what we know to be the fact is that as we reduce our discretionary spend over time, we defer capital investment. We use that money to do other things as that deferred maintenance bucket continues to increase. Eventually it overwhelms our ability to do strategic planning. So as I like to say, if we let the building go far enough, we don't have to do strategic planning anymore.
The building will do it for us in the form of unplanned repairs and emergent failures. Now, this is a bit dramatic, but I think everybody on the call has had different experiences. You know, think of a car that's got 150,000 miles on it. It's running great. Until it doesn't, it's fine around town, but you may not want to drive to California with your family if you're from the Midwest like I am.
So again, understanding that is important. The trend then that we see is given a fixed budget line over time. If we lose the green buckets, if we if we fail to do I shouldn't say we fail. If we don't have the ability to make those investments in the proactive things that actually improve the building, eventually we get overwhelmed.
And again, that deferred maintenance is just going to continue to pile on more firefighting, more reactive work. So stop it now and talk then about the operational budget. A lot of our customers and a lot of the market feedback I hear it isn't the capital. The capital is an issue. We know that a lot of organizations have frozen their capital, but scuse me, I get a lot of people, them that ask me, what about the operational side?
So I want to drill in here a little bit further on the operational side and talk about some different ways to look at those buckets and understand the relationship. So you see here, I've taken the blue and the yellow buckets and I've split them out in a different way. Specifically, if we isolate utilities. Utilities is a mandatory fixed cost.
We have to pay our electric bill and our gas bill, and then we have our direct labor. So we have our staffing, you know, up to and including the management team. We have direct labor that we use for compliance and preventive maintenance and so on. But then we also rely on purchase services. So these three elements within your operational budget, utilities direct labor and purchase services, all of those things together represent your full operational budget.
And I would include purchase services, I would include the purchase of spare parts and things like that. But think about this operationally. Understanding the difference between direct labor and purchase services. Cost is a key, key element, and I'll show you why here in a second. The point of this type of analysis, you're building essentially an income statement for your facility.
There is a theoretical flaw that you cannot reduce costs further because everything under this floor is mandatory. So having a well documented identification of where the money's flowing in your facility so that you can talk to your CFO and say, you know, you want to cut here, you want to cut there, but this is mandatory work. We have to do it for accreditation, so on and so forth.
And then the green buckets come on top of that, and that's where we seek to optimize the budget. So again, the budget battleground begins at that floor. Now we have to show our leaders that everything we're doing in the yellow and blue buckets, we're doing it as efficiently as possible. That comes back to our CRM systems, that comes back to our strategic asset management systems.
It's very important to show we are being good stewards and we're doing that work as efficiently as we can. But it is mandatory work and then we can have the discretionary budget discussion separately. That's that's, I think, where we optimize the budget. Now, why am I separating labor from purchase services? This is the age old game that we've all had to play and it becomes very important when we talk about staff reduction.
So I'm going to show you some data here. Now, you always have to be careful in presenting data. This is an answer. It is not the answer. And my point here is this is a study that friend of mine, Dr. Steven, call out at Washington State University, did a study. This is a sample set of 12 hospitals. And if you look down the bottom from an operational standpoint, you see some dollars per square foot.
Now in this hospital system, 48% of the operational budget is being spent on outsourced professional services, 23% on labor, and then 30% on the utilities. So utilities are utilities, Right. The reason this is important is because the leadership in this group is putting continued pressure to reduce FTE. But that's not where the money is being spent. We all know that every time we cut fees on mandatory workload, we now have to outsource that.
And oftentimes we're going to pay a premium 2 to 3 times higher than our internal labor rates. So we see people outsourcing things like ice machine cleaning and fire door inspections. And I'm not saying whether that's good or bad. There's a lot of other factors we have to take into put into account. But if we continue to reduce our fees internally and we're now spending more money externally, it's very important to be able to present that picture back to the CFO.
I've seen a lot of cases where actually hiring more staff, if that staff is available, can actually save the organization a lot of money. The next thing we want to look at, if you understand in your organization, all of these different buckets and how that money's flowing, then it's important to look at the deferred maintenance and look for ways to determine how is my deferred maintenance affecting these things?
Well, if I have 40 and 50 year old assets, my energy spend is likely going to be higher than if I were using newer technology. If I'm seeing a high again, because of deferred maintenance, maybe my unscheduled break fix workload is significantly higher than it should be. The point here is not to say there's a right or wrong answer, but again, we want to focus on understanding how the money is flowing and it'll change the way that you can engage, hopefully, and collaborate with with your non facility leadership.
So hopefully that makes a lot of sense to everybody. I'm throwing a lot of conceptual stuff. I do want to dig in now and look at some specific numbers as it relates to the relationship between all of these things. Keep an eye on my time here. Okay. 130 So looking this is another cross-section of the buckets, right? Kind of going back to that original footprint.
And I highlight again the works of an Origin CMS in Origin. This data exists in your system somewhere, whether it's in your CMS system, Maybe you have a you're using a technology suite to track your energy bills. However you do it, use your fingers and your toes if you have to. But understanding again, what are your dollars per square foot?
What are your spend levels in each of these areas? Now, why is that important? I'm going to focus on the relationship here between preventive maintenance as an operational spend, deferred maintenance as a facility debt and capital replacement. There is a relationship here and we're going to investigate that. The reality is, as you build your business plan, their relationships across the board, energy versus staffing, break fix versus age of plant, so on and so forth, We don't have time today to go into all of those.
But again, I just encourage you to think about not just going into the budget season. You know what? What can I get next year? How do I put data in front of the leadership that they're going to pay attention to? So using our origin data and taking that national footprint and then standardizing down and just saying per million square feet.
So these are again, it's an answer. It's not the answer, but it's very, very statistically repeatable. When I walk into a facility that I've never seen before, I'm going to use these numbers as an initial baseline of what I expect to see in terms of deferred maintenance. So for millions per million square feet of acute space. So think of a typical million square foot campus main hospital plus supporting infrastructure.
We're going to see about 1300 tier one assets, major assets, about $140 million in total replacement value for those 1300 assets. And if we follow the historical trend on deferred maintenance, about 56 million of that is going to be in deferred status. So that's a that's kind of a guideline of what I would expect to see. That translates into a capital need, an annual repair and replacement capital lead of somewhere between three and $6 million annually.
That level of spend over ten years or so, $3 per year for ten years, sorry, 3 hours per square per year. If you follow the math, we're projecting out where do we want to be ten years from now. That's an awesome conversation to have with your CFO. What is an acceptable level of deferred maintenance? People ask me that all the time.
There is not a right. There is not a right or wrong answer. It depends on what's in deferred maintenance. It may be okay to have 50% of the assets in deferred status, but I don't like to see generators, automatic transfer switches, fire alarm systems and so on. So again, knowing what is in deferred status just adds more credibility to the discussion.
Okay, Mark, that's great. Now, let's talk about the operational side. So based on our data, it would cost anywhere from 500000 to $1000000 per year to fully fund the preventive maintenance of those 1300 assets. So this is filter changes, lubrication, monthly generator tests, all of the different things that we have to do to maintain that equipment. Why is it 500000 to 1000000?
Because it ranges considerably based where you are in the country. Are you using internal labor, labor or external labor? But again, you can answer that for your facility. But if we just look at these numbers, it creates an interesting discussion. JLL published a study about five years ago and so it's a little bit dated, but the quality of this analysis is awesome.
And what they did is they talked about the financial benefits of preventive maintenance in terms of how does it impact the expected useful life of equipment. And as you can see here in this diagram, each different asset type has a different requirement. So we start to see things like X units and chillers. We know those are high maintenance items, right?
They require preventive maintenance. Manufacturers expected useful life depends on what the manufacturer assumes that you're going to do all of the maintenance. You know, General Motors, if you buy a car, they expect you to follow all of those recommended service intervals in order to get the maximum life expectancy of your vehicle. What JL also showed here is that there's a significant reduction in expected, useful life based on whether or not that preventive maintenance is performed.
Now, what we did in our models is we just took a straight line 20%. So what would happen if we could model a 20% change in the expected useful life of all the assets in a hospital? How would that impact the capital needs? So that's what we're going to talk about here. So on the top line, what we did is we took out it's about a million square foot portfolio.
And we said, let's just assume that we're doing 0%. We're not going to do any preventive maintenance. Now, that's not realistic. We know that we're going to do some, but let's just use this as a model for this hospital. If we have zero preventive maintenance, we would have a ten year capital need approaching $100 million. That's just based on the age and condition of the equipment and using that 20% shortened life cycle as a standard.
If we run the same analysis against those assets and we assume perfect preventive maintenance, we're going to do everything 100% right. You see our ten year capital needs are 78 million. So simply by changing the expected useful life of each asset in the portfolio, we've impacted our ten capital needs by almost $20 million, a little bit over $20 million.
That's huge. So when we take those numbers and we then tie it to a return on investment type calculation, what we're saying here is $500,000 a year in dedicated operational spend to do preventive maintenance is going to impact about two and a half million dollars a year in capital need. So we took the ten years, we turned it into one year.
No matter how you slice it, what we're talking about is increasing operational spend. At a time when capital is scarce is actually one of the best financial decisions an organization can make. I think a lot of people on the call probably experienced this during COVID. We we lost capital and then we reduced headcount. And I say this carefully and I say it seriously.
It was probably one of the worst financial decisions we could have made as an industry, because at a time when we don't have that capital, we should have been doubling down on the maintenance and doing everything we can to protect the life cycle of the equipment that we do have. So it's often a difficult conversation to have. But again, we work with each one of our clients in these cases to understand how can we develop that relationship.
There are some buildings that are so far gone, they're so aged, they have such a high level of deferred maintenance that there really isn't enough PM to change it. So then we have to have master planning discussions. Do we keep this building or do we tear it down? Do we do a major renovation? So on and so forth?
But again, we want that to be a more collaborative, collaborative discussion than a competitive one. And then we have the new bucket, the sustainability bucket. I bring that back to the table because this is the new game in town. I'm aware of organizations that have done studies. What would it actually cost them? What or what would they have to spend in order to achieve the ESG goals that have been committed by their organization?
And if you look at a typical 10 to 12 hospital type system, that investment can be upwards of 40 to $50 million. And in some cases, it actually increases operational spend because we're moving natural gas to electricity. And in some parts of the country, that's a more expensive operation. Right? Gas is cheaper than electricity in some parts of the country.
So my point of this is this is a direction that we're going. But I use this little analogy, right? There's a light at the end of the tunnel. Now, that light could be the exit to the tunnel, but it could also be the headlight on the train that's coming down the tracks. I think ESG is coming down the tracks.
And I'm not talking about the political elements of it and all of that stuff. It is a reality that we have to face today along the hardening of our facilities against natural disasters, the changing health care environment. There's a lot of strategic things that we're being asked to do. We cannot achieve those goals if we don't also address the infrastructure.
So that's my point here. Can we use ESG with credibility, with sincerity, and with integrity? Can we identify ESG projects where we can reduce energy consumption, We can decarbonize, we can harden the facility, but also direct those that money against deferred maintenance. The worst possible scenario here is that we we start to have failing assets. We run to fail.
We lose the opportunity to engineer in a better, more efficient solution. So I think these two buckets go hand in hand. Any time we can link infrastructure repair and replacement tag, it is an ESG project. Promote the decarbonization, whatever the mission of your organization is. Let's use that as an opportunity to start offsetting some of the aging equipment.
So we're not just replacing your Handler 21 anymore. We're replacing the area that serves the surgery suite with a unit that's going to have X percent energy, so on and so forth. It's a little bit of marketing and a little bit of sales. But again, it's a different way to dialog. And if we have the numbers behind it, we can have that conversation objectively.
So the final section here, transformation, and then we'll leave a few minutes for questions. The three questions that we're really framing up here. How much should be invested in the facility to properly maintain it right capital. We know those numbers operate. We know those numbers. Each site, each facility. Director, I would encourage you to do a forensic audit, a financial audit of your books.
Where are you spending the money? Is that spend mandatory or is it discretionary? And what's the relationship between doing it? Insource and outsourced? It's it's it's not sexy work and it's not always easy. But if you start to build that triangle, if you will, and understand that money, now, we can have a really different conversation. Second question is where do we make that investment to mitigate risk?
Well, again, we want to focus on life safety. That's a huge risk element. We want to focus on energy. We want to focus on decarbonization. We want to focus on hardening of the facility. Right. The natural disasters are hitting us harder and harder. So understanding where we need to invest, we should not be renovating the visitor's lobby. If we have generators that are in exposed environmental situation subject to flooding, those types of things, those are real and difficult conversations to have.
But it all speaks to the risk ranking in the prioritization, prioritization of that investment. And then the third piece, which is really, really key, and this is something that we track in our origin platform, how do we document these improvements? How do we show that the $3 million a year is actually impacting the health of the facility? How much did we reduce the deferred maintenance?
How high? How much did we increase the health score of our facility? How much energy did we save? If we can have this feedback loop and show our non facility leadership that we're being good stewards of the precious financial resources they're giving to us. Now we're in an upward spiral. Now we we're building trust and we're gaining momentum.
So the first step then is again coming back to the hierarchy of needs. We really have to establish that foundation. Deferred maintenance is a strategy. There are some organizations that are run to fail. That is a strategy. I don't agree with it. I don't think it's a good strategy. But some people want to run that way. So understand how what's important to the to the facility, how do we want to manage?
Again, coming back to strategic asset management. I think communicating that strategy and getting by in one way or the other with the leadership, do we want to be run to fail? No. Do we want to be preventative? Yes. Do we want to be predictive? Yes. Well, that's a great way to engage the leadership. Leverage the work that you've already done.
Focus on the inventory. Do you have an accurate inventory of your assets? I walk into a surprising number of facilities that don't have a clear line of sight to the equipment in the building. Peter Drucker, famous quote here You can't manage what you can't measure. So by all means, if you if you don't have good visibility to what's in your building, make every effort to do so either internally, hire an external firm, do an FCA, whatever it is needed.
Without that baseline accuracy, it's very, very difficult to do anything else that we talked about. And then understand the buckets as best you can. You know, again, use your fingers in your toes, use your system, use a platform like origin, draw it on the whiteboard, whatever it is. Take the time and go through and understand it. You might be surprised.
I was working with one hospital down in Texas and we did that. We just sat in a room for a half a day and we started compiling the costs, fire alarm, testing, rounding things at, science, fire extinguishers, fire doors, generator tests. We put through the whole list and just started writing down numbers. How much are we spending here?
You're just in that simple little act. We saw this huge number on the fire alarm, and it's like that doesn't seem right. And so just that simple act triggered an action for somebody to go look at that. And it turns out the contract was fine, but the money was being misappropriated within the finance system. So it looked incorrect.
But that type of engagement. Why? Why, why, why are we spending that kind of money on the fire alarm? Why are we spending that kind of money here? Again, it's just it's a different management technique. Right. I understand a tolerance for risk. This is really the credibility to value transition, communicating deferred maintenance with the non facility leadership. What is an acceptable level of risk?
How does our deferred maintenance compared to others? Where do we want to be? All of those types things, type of things. But again, aligning here with the mission, the vision and the values, presenting the data credibly and objectively in financial terms. Most CFOs don't understand air handlers and heat exchanger and chillers and and they don't care. And I don't mean they don't care about the facility.
They actually do. But they care in a different way. They understand the money side of it. They understand revenue and they understand patient, you know, patient care. So I think we need to meet them where they are, not where we want them to be, and present this data again in a real way. Seek first to understand, then to be understood.
Ask your CFO what type of information would be helpful for you to make better decisions and then do everything you can to build that and present it to them in a way that they can easily understand. Take them on a tour of your facility. Show them what a chiller is and what it does. Show them how difficult it is to get cold air conditioned air in a patient room on a hot summer day.
Look for any way you can to engage that leadership and then ultimately partner with the leadership. This is what we want to get at the top of the pyramid, the optimized Strategic Asset Management. This is what gets us a seat at the big table. Share the business plan. Share the results. Here's your income statement, if you will. Here's how you're spending your money today.
Here are the decisions that you've made to try to make that spend as efficient as possible. But then also talk about the reality. Here's where we're going to be in five years or ten years if we don't do something different. As my friend Matt likes to say down, at no point give them options. Not problems or ultimatums. I think the most important takeaway here is as facility folks, it's not really our place to tell the CFO, Did they make the right decision in purchasing that MRI instead of purchasing the air?
We always feel slighted when that happens, but our job isn't to question that decision. Our question is to give them the data so that they can make the best decision possible. We may not always win the CFO may still buy the MRI, but at least we've put the data on the table that shows there is a cost to not funding the air handler and that cost is going to show up in increasing deferred maintenance in the facility.
I think a lot of CFOs today, if they choose not to invest in the facility, it's a right. If I buy the MRI, I get return on investment. If I buy, if I put it in the facility, I get nothing. Well, that's not quite true. When that air handler fails, there's going to be a negative ROI associated with that.
So again, preaching to the choir with with this community. But hopefully you understand my point here. Let's give them the data. Let's give them every opportunity to make a better decision for the facility. So I'll stop here for a second and open the floor up to questions. It looks like we're about 10 minutes ahead of the hour, so we've got a little bit of time.
Regina, I don't know if any questions came in chat, but I want certainly open up the floor. If you have questions or comments, please share them with us. Yes, Mark, we do have a few first one is based on your research, do you see hospitals increasing budgets with aging infrastructure and or assets or cutting and staying flat on budgets during these times?
What I'm seeing in most cases is with aging. Well, let me back up. I have not seen organizations that specifically and consciously choose to increase budgets with the knowledge that the infrastructure is aging. But having said that, we do know that in the age in the aging facilities, that non-discretionary workload continues to go up. Right. It's just a natural order of things.
What we also see in aging infrastructure is very often it's not a single building, right? It's an older facility that's had a lot of different buildings stuck together. The biggest demand driver on operational spend actually isn't square footage as she's been struggling with this for years. It's the asset density. It's the asset density within the square footage that increases the workload, not just the square footage.
So a million square feet I know I painted some broad pictures of here's what I would expect to see in a million square feet. But the reality is how that million square feet is configured will will determine those budgets. So the answer to the question is, I'm not seeing organizations proactively increasing budgets. We do see some with this data.
We see some organizations pay more attention to the capital, spend. But right now in today's world, everybody is hammering those operational budgets just due to the to the financial situation. So anything you can do to put that data out there and use that to to at least protect the budgets that you have is probably a good play. I hope that answers your question.
Whoever asked that there are no other questions when you open it up on the floor. If anyone does want to request questions through the chat. Just while we're waiting to see those come in, we did have a question come in not regarding with the presentation itself, but for the recording. So just to let everybody know that the presentation will be shared with everyone in a few days.
You can look for it in your email. It will be sent with the link from brightly software. So look, go for that.
Okay. Thank you, Regina. A couple of things before we wrap up here. I know we're getting close. I appreciate the the last question that came over and I'll take one more bow around that. This is an easy, folks. It takes a dedication effort to to do that forensic audit to dig in and think about your facility in financial terms in the middle of having to deal with all the engineering stuff that's going on around us.
So I would encourage you to reach out, you know, reach out to me if you have follow up questions, go read that article in each of them magazine. You know, by any means necessary if we can help educate on just how we can do this, I think we can make a big difference. There's a second part to this webinar.
Just again, a little bit of a shameless plug, but to advertise, as we as we lead up to actually we're going to do a presentation here at the end of July. It's called The Boiler from the Boiler Room to the Boardroom. I'm going to take these concepts that we talked about today. I'm going to go kind of one level higher.
How do we sell the value of infrastructure? How do we create that need? How does a CFO look at what is a cost center? What's in your CFO mind when they think about facilities? We've all heard it. It's a cost center and there's no ROI and infrastructure. I respectfully disagree with that and I'm going try to talk about that in the next webinar.
So I do hope you can join us at the end of July. Also, we will be at AC. Look for us in Booth 627. You'll see the brightly booth it's hard to miss. And then I wanted to let you know that Matthew or Matt, Steve, Jonathan Flannery and I will be speaking and actually we have a breakout session on Monday, August 7th.
We're going to take a lot of this same concept. I would encourage you to come there. It's not to just hear me and not to see some of the content. But Matt, Steve in particular is is quite progressive in terms of the work that he's doing in his health system. I rely on him a lot for input myself, but we really want to present this not as just a PowerPoint presentation, but it's a discussion.
And Jonathan has a great perspective from an AC, from an AC perspective or AC point of view. So encourage you to come. Let's have a dialog. I think the best thing we can do here is to keep keep the conversation going. So I appreciate that. Last thing, folks, I mentioned, this is an easy the budget battle ground continues.
I didn't mean for it to sound all doom and gloom at the front end. There's this, but there are some significant challenges ahead. But also some significant, significant opportunities. So in the meantime, I encourage you, never give up. Don't quit the fight. All Of you have very, very important roles in our health system and it's very much appreciated the work that you do and the value of the work that you do.
So I encourage you keep fighting the good fight, and that's all I have, Regina and team. So I want to thank everybody for attending. I hope this has been helpful, informative. Please don't hesitate to reach out if you have any further questions or if I can help you in any way. I appreciate your time today.
