Financial Guide: How to save money and create value in a tough economy

Problem Statement: Challenges, Opportunities and ROI.

There is an unrealized opportunity to decrease operating expenses and improve shareholder value and profitability through improved management of real estate and workplace assets. This is due to the absence of the following: an awareness of the potential available, a single “source of truth’ containing reliable and complete data, a performance measurement system, and a rigorous management approach based upon financial performance targets.

A recent report by CoreNet Global surveyed 100 firms regarding space utilization offers some relevant information. The report revealed that utilization rates range from 45%-65%. This means that at any moment on average, 55% of the existing office space is vacant.

Colliers International reports that there currently is 4.7b square feet of commercial office space in the North American Market. If we assume a very conservative rate of $15.00/square foot that means there is close to $40b of overpaid rent being paid each year. A recent report in Commercial Property News indicated that in 2007 there was $56b of Global Sale-Leaseback Transactions. This strongly suggests there are rich targets of value creation and cost reduction in real estate assets.

Introduction and Background:

For many organizations, the management of real estate and the workplace remains a somewhat opaque and arcane area. Often this function is viewed as a pure cost of doing business. And, while this can be the reality, more often it can be a potential source of value creation and can be a positive contributor to profitability and increased shareholder value.

So, why do many organizations overlook the financial opportunities that reside within this area? We believe that this situation can be traced to the following factors:

Analytic Approach: Perhaps the primary challenge comes from the need to shift perspective from pure real estate performance to one of addressing the business implications of real estate decisions. To maximize benefits one must adopt a viewpoint similar to that of a real estate investor and demand property level performance.
Non alignment with business objectives: There often can be a disconnect between objectives of the C-Suite and that of the real estate professionals. This can result in an in-coherent set of objectives and a lack of awareness of the level of invested capital.
Absence of Performance Measurement Framework: The creation and management of an appropriate and targeted set of Key Performance Objectives is critical to assure alignment with organizational objectives.
Absence of Data: More often than not, data regarding individual properties resides in a variety of discreet internal and external data sources, and may not be complete, accurate or current.

In approaching the subject of Creating Value and Return on Investment Models, the findings from a recent study by CoreNet Global of 100 of the Fortune 500 companies are helpful in framing an approach toward influencing the organizations financial performance:

Approach:

• Consumption: Reduce or eliminate the activity

• Hidden Value: Determine difference between book and market value

• Release Capital: Arrange sale and lease-back for capital re-deployment

Case Studies: Targets of Opportunity:

Absent a complete inventory of the portfolio it is difficult, if not impossible to isolate targets of opportunity by indentifying under-performing or under-utilized assets. Engaging in a process of portfolio study and rationalization can directly and immediately impact shareholder value by identifying under valued assets revealing a hidden source of value.

The following case studies are presented to suggest the range of strategies and tactics that can be employed. One caveat perhaps needs to be extended. Each portfolio is unique and represents its own set of opportunities. Experience has shown that it is rare when one or more of these approaches cannot be deployed. The following represents a brief description of selected case studies and strategies. More detailed information on each case study is available upon request.

Expense Reduction and Hidden Asset Value

•	Identification of hidden value through undervalued assets.	•	Reduction in building class/type
	Client: Global Manufacturer of Specialty Glass and Ceramics Objective: Identify sources of capital for re-deployment in the enterprise. Result: Multiple locations identified where book value understated market value in the aggregate amount of $250 m.		Client: Global Consumer Products Manufacturer and Retailer Objective: Validate need for Class A office space. Result: Call centers were shifted to Class B office space at a cost savings of $10/sq. ft. or an annual cost savings of $10 m.
•	Sale and Leaseback:		Client: Global Marketer and Manufacturer of Consumer Brand Name
•	Client: Global Manufacturer of Aeronautical, Space and Electronics Equipment Objective: Indentify sources of capital for re-deployment in the enterprise. Result: Multiple owned properties were packaged for sale and lease back negotiation to capital markets. 10 of the 12 properties were successfully negotiated generating $500 m of capital infusion. Reduction of vacancy rate: Client: Global Credit Card & Financial Services Corporation Objective: Reduce vacancy rates to increase asset efficiencies Result: Consolidation of space and re-stacking in headquarters complex resulted in a net space reduction of 350,000 sq. ft. and an annual cost savings of $7.5 m.	•	Products Objective: Determine proximity requirements to determine if administrative functions could be re-located to suburban locations. Result: Shared services were re-located to alternative remote locations resulting in savings of $15/sq. ft or an annual savings of $18 m. Re-negotiation of rents Client: Global Telecommunication Corporation Objective: Review lease terms to identify cost savings through renegotiation. Result: Identified over 500 leases representing over $700 mm of annual rent expense. By negotiating rent abatements through release of options, annual cost savings of $250 m was achieved.
•	Introduction of space standards		Client: Diversified Global Manufacturer of Industrial and Consumer
•	Client: Global Manufacturer of Computer Chips Objective: Rationalize space use across the enterprise Result: a 20% reduction in space resulting in an annual cost savings of $48 m. Introduction of Alternative Workplace Strategies Client: Global Manufacturer of Hardware, Software and Information		Products Objective: Introduce a full charge back of costs for real estate occupancy costs to influence behaviours of business units Result: Over 40% of the business units requested assistance in space reduction and rent re-negotiation as a result of occupancy costs hitting their operating statement resulting in $42 m annual cost reductions to date.
•	Systems Objective: Rationalize space costs and reduce expenses Result: Changed the FTE/desk ration from 2.2 to 4.8 resulting in space reduction and annual cost savings of $78 m. Consolidation of service centers/regional offices Client: Global Manufacturer of Networking Equipment and Services Objective: Map locations and travel times to reduce commutes and reduce number of services centers	•	Reduction on number of moves/costs of moves: Client: Global Automotive Manufacturer Objective: Reduce churn rate by 50% Result: Annual run-rate move costs exceeded $300 m per year. By charging all costs back to business units, moves were reduced by 35% resulting in an annual cost savings of over $100 m. Reduction of employee turnover:
•	Result: Consolidated operations resulting in the closure of 6 service centers at an annual cost savings of $123 m. Co-location of business units creating overall space reduction. Client: Global Manufacturer of Handheld Communication Devices Objective: Gain co-operation of individual business units to collocate		Client: Global Credit Card and Financial Services Corporation Objective: Reduce recruitment and retention costs Result: Through a series of pilots, various space alternatives were tested to determine how work conditions/space design impact retention. New design alternatives revealed versions that reduced turnover from 28% to 15% resulting in and annual cost saving in recruitment and training of $8 mm.
	Result: A net reduction of 2.5 m sq. ft. at an annual cost savings of $55 m.	•	Reduce Space and Improve organizational performance:
•	Improved utilization resulting in less space.		Client: Global Marketer and Manufacturer of Computer Equipment and Services
	Client: Global Manufacturer of Electronic Analysis Devices Objective: Track actual utilization to benchmark % of time spent in space Result: Utilization rates ranged from 40%-65%. Space was consolidated and alternative workplace strategies introduced. This generated a 3.5 mm sq. ft reduction in space at an annual cost savings of $43 m.		Objective: Reduce annual occupancy expense without impacting organizational performance. Result: To provide for both face-to-face and virtual collaboration as well as knowledge sharing, over 3 years 20 m sq. ft. was taken down and the balance re-configured. Net annual cost savings run rate is currently $35 m. Stock price increased 250% in the same period.

Performance Measurement:

As stated in the introduction, a key enabler to support these initiatives is the establishment of a comprehensive decision support system. Aggregated, current and accurate data is essential to the process. The approach to creating such an environment includes the following components:

Data Creation/Quality

Experience has shown that many organizations lack complete, accurate or current data regarding their real estate and workplace portfolio. This is further complicated by the fact that what data is available, is typically found in a variety of discreet and disparate databases. These problems can be due to lack of portfolio level perspective and attention, absence of assigned responsibilities or simple lack of awareness of opportunities. Recommendations for correction would include:

Establish Business Objectives and Accountability:
Real estate and workplace performance must be viewed in the context of how it supports business line objectives. In doing so, performance targets become grounded in business goals and accountabilities are established to create and maintain the data to support performance measurement

The creation of both data standards and standardized processes to maintain the data is fundamental to a successful performance measurement program. Data accuracy and currency can only be assured through enforcement of standards.

Data consistency and accuracy is more easily delivered when there is “a single source of truth.” It is preferable to initiate a strategy to consolidate data sources to the degree that is possible. A logical and methodical retirement and consolidation of discreet systems can result in both more accurate and timely data and a reduction in system maintenance costs.

Aggregation of data remains the Holy Grail for an effective and efficient performance measurement system. This supports the presentation of timely and relevant key performance indicators to the respective stakeholders on an on-demand basis.

Performance Dashboard

To begin to address the issue of absence of data access, the creation of a performance dashboard would be critical to the alignment of real estate and the workplace with organizational strategy. In doing so, organization financial and business objectives would be linked to the real estate strategies. Key components of the dashboard would be:

Transparency:
This term has become part of the standard lexicon of business. And the importance for performance management cannot be overstated. Universal access by appropriate stakeholders, any time, any place and via any device is the current mantra. Transparency allows for collaboration on real-time data that speeds the decision process and focuses behaviors.

Relevant Metrics:
One size does not fit all when it comes to metrics. This applies when looking at different vertical markets and industries. However, it also applies when looking at different management levels in the organization. Metrics can and should be few in number, but should be laser focused on those that the individual can influence.

Real Time:
The provisioning of current data is critical to success of the performance management system. It is predicated on standard processes and clear accountabilities, but also must provide an infrastructure that accesses the most current data and presents that data in a clear and coherent manner.

Trending:

Historical information can be valuable and interesting. However, historical information is just that. What is needed is information by which we can influence the future. Therefore, historical information that is presented in a temporal context and displays trend lines provides decision support in the form of where to place attention and take action.

Key Performance Indicators (KPI’s) & Metrics:

Following upon the old adage “you can’t manage what you don’t measure” we suggest that the establishment of relevant, personalized and agreed to metrics can be at the heart of the matter. It is important to discern what your organization values, and measure that. These need not be overwhelming in number, but speak directly to organizational performance. Key factors would be:

Actionable: Able to be influenced
Accountable: Clearly Assigned responsibilities
Transparent: Collaborative/On-demand
Relevant: Industry targeted and multi-tiered

Suggested Starting List of Recommended Key Performance Indicators:

The Executive Committee typically does not routinely need real estate information. However, a small but targeted set of KPI’s is suggested. The following is representative of a baseline set of starting KPI’s that will allow for both tracking internal performance and to conduct external benchmarking.

Executive Committee Level	Real Estate and Workplace
Occupancy Cost/Business Unit Revenues	Occupancy Cost/Square Foot
Occupancy Cost/Invested Capital	Occupancy Cost/FTE
Occupancy Cost/ Business Unit S G & A	Annual Maintenance Cost/Replacement Value (CRV)
Occupancy Cost/Business Unit Headcount	Vacancy Rate/Business Unit
Unlocked capital/Business Unit	Utilization Rate/Business Unit

Summary

Real Estate and Workplace industry metrics and studies strongly suggest that hidden value on the balance sheet can reside within real estate and workplace assets. It is equally true that a potential positive impact upon operating statements can be enjoyed by a rigorous and focused examination of property level performance.

This can be facilitated and enabled by a adopting a strategic view, setting financial performance objectives and the provisioning of a space & portfolio management system to provide decision support. Huge opportunities await those organizations choosing to adopt such an approach.