Shortly after Mark White became the chief financial officer of SAP Americas Inc. in 2002, LuAnn McHugh, the software company's vice president of real estate and facilities, approached her new boss with a restructuring plan that she envisioned would erase some inefficiencies in theportfolio.
The plan included consolidating about 10 offices, buying out five leases and tightening standards for officeand use. Over a nine-month period, not long after White's arrival, this program shaved $15 million in corporate real estate expenses, according to McHugh.
“Our CFO's support was critical to the success of these changes,” she explains. “Mark fully supported the changes, and my team and I were able to implement them without resistance.”
McHugh's team oversees more than 2 million sq. ft. of offices at about 100 locations in North America, Latin America and South America. SAP Americas, based in the Philadelphia suburb of Newton Square, Pa., is a subsidiary of German business-software powerhouse SAP AG, which posted revenue of $12.2 billion last year.
Although McHugh reports directly to White, who personally reviews every real estatedrawn up by her team, day-to-day operations are under her purview. McHugh says she enjoys tremendous latitude in her job and a “fairly independent relationship” with the CFO — the kind of autonomy and trust that cultivated the restructuring plan.
A measurable difference
For his part, White says that he and McHugh “are in sync as to where we want to take the business, and I rely on her business acumen.” That acumen has borne results. In 2006 alone, SAP Americas whittled its space needs by 14% and its rental costs by 32%, despite 21% growth of the company's workforce since 2003. Consequently, McHugh's team members have “earned a wide berth in how they perform their jobs,” White says.
Through her collaboration with White, McHugh implemented new standards for office design and use that drastically altered the traditional workplace at SAP Americas. Today, every employee up to the vice president level occupies a workstation. Only senior and executive managers are given their own offices.
Space allocation at SAP Americas doesn't exceed 250 sq. ft. per person, including reception, training and sales demonstration areas. If an employee occupies an office less than one-third of the time, he or she shares a desk. Office use is checked via employees' security badges. Before the new standards were put in place about five years ago, SAP Americas had as many as 150 people assigned to an office space in some cases, with only five or six actually working in the office each day.
The Sarbane-Oxley effect
As financial scrutiny of Corporate America continues to intensify, an increasing number of corporate real estate and financial executives have grown to be trusted advisers for one other. Together, they are cutting expenses and extracting value from property, as companies feel mounting pressure from regulators, directors and investors to monitor and improve the bottom line.
Sarbanes-Oxley, which was signed into law in 2002 to establish strict financial controls among public companies in the wake of corporate scandals such as Enron, has helped knock down corporate silos that once hindered cooperation between a company's real estate and finance units.
“Sarbanes-Oxley got many companies thinking about how to get proper control over real estate functions,” says Mike Whalen, a partner at professional services firm Ernst & Young LLP.
In fact, an estimated 70% of corporate real estate executives now report to their companies' finance units, according to Prentice Knight, CEO of corporate real estate trade group CoreNet Global in Atlanta. That's up from about 50% just six years ago, before Sarbanes-Oxley was enacted.
It's no wonder that business executives and board members have turned a sharper eye toward corporate real estate. Next to personnel, technology and materials, real estate ranks among the four biggest expense at companies. On average, corporate real estate comprises 5% to 10% of business costs, according to a report from CFO Research Services and United Systems Integrators Corp.
Building a smarter model
Historically, corporate real estate has been an afterthought for many CFOs because, unlike the supply chain or sales operations, the ability of corporate real estate to change rapidly and influence a company's strategy has not been readily apparent to CFOs.
Corporate real estate was regarded as a non-strategic expense best left to the company's real estate experts, according to the CFO Research Services report.
That's not the prevailing attitude at United Technologies Corp., a Hartford, Conn.-based manufacturing conglomerate whose products include Carrier heating and air-conditioning systems, Otis elevators, Pratt & Whitney aircraft engines and Sikorsky helicopters.
Until six years ago, each business unit at United Technologies handled its own real estate matters. In 2001, executives decided to ditch that disjointed approach and wrap all of the corporate real estate functions into one organization — a wholly owned subsidiary called United Technologies Realty Inc.
In tandem with outsourced service providers, the four-member staff of the real estate arm manages more than 110 million sq. ft. at about 4,900 locations in more than 60 countries. United Technologies, which reported revenue of $47.8 billion in 2006, spends an estimated $1 billion a year on corporate real estate. Currently, the real estate staff is juggling more than 1,700 transactions.
Ron Zappile, president of United Technologies Realty, says he regularly shares details of those ongoing deals with Tobin Treichel, vice president of tax, and with various corporate CFOs. “It doesn't do us too much good to hold a deal really close and then spill the details afterward,” Zappile says.
“It's much better to have the involvement of all of the people who are involved in the transaction,” Zappile adds. “Then, in effect, the CFOs at their various levels become our best salespeople for the deal. If they believe in the deal, the likelihood is that it's going to get done.”
Treichel reports to CFO Steve Page and is the official finance liaison, known in company lingo as an “executive sponsor,” between Zappile's group and United Technologies. Among other things, Treichel helps Zappile's team obtain approvals for policies and processes and helps mine the real estate portfolio for additional value.
Hardly a ‘dead asset’
Zappile was named head of Farmington, Conn.-based United Technologies Realty in 2001. Yet he wasn't plucked from the ranks of corporate real estate. Zappile, who earned an MBA, held various finance, treasury, manufacturing and engineering jobs within United Technologies before accepting the real estate post.
Zappile was picked for the real estate position based partly on his financial and operational experience and on his role in the mid- to late 1990s on a team whose work led to the consolidation of five Singapore offices into one regional headquarters — a move that slashed $3 million in lease expenses.
Since the formation of United Technologies Realty, the parent company has achieved corporate real estate savings of more than $250 million. Over the six-year life of United Technologies Realty, the company has consolidated 117 sites and disposed of more than 20 million sq. ft. of space.
Zappile's group has evolved into “a true center of excellence” within the company, Treichel says, and has underscored the notion that corporate real estate should be considered a manageable cost as well as a valuable asset.
One of the tools Zappile's team uses to execute cost-cutting measures is a database that tracks United Technologies' real estate holdings. The database, which has been used since 2003, is part of the company's real estateand property management software system.
Before United Technologies Realty was formed, the company lacked a comprehensive mechanism to keep tabs on its vast global portfolio. It wasn't unusual for an executive to be oblivious to the fact that a United Technologies subsidiary occupied space just five blocks from the location of another subsidiary in the same city.
United Technologies wasn't alone in that regard. A 2005 report from Ernst & Young points out that many companies have maintained incomplete or inaccurate information about their real estate portfolios, including locations, square footage, vacancy rates and occupancy costs.
Indeed, portfolio audits over the past four years have turned up about 7 million sq. ft. of space that was previously unaccounted for at United Technologies, according to Zappile.
United Technologies' introduction of the Web-based database four years ago filled an information void. The database also has helped finance executives grapple with such issues as property taxes and governance, Treichel says. In fact, the new Web-based technology has resulted in millions of dollars in cost savings.
Upon combing through the database in 2003, an account manager in corporate real estate identified the potential to dodge a costly real estate dilemma. An aerospace group within the Hamilton Sundstrand subsidiary was vacating space in Long Beach, Calif., while an industrial group within the same subsidiary needed room to grow in the same city, Zappile recalls.
The industrial group wound up occupying the building abandoned by the aerospace group. More importantly, United Technologies avoided $4 million in capital expenses by not having to retrofit the building's ceilings for the industrial group after it was discovered they were 24 feet high, rather than 16 feet high, as initially believed, Zappile says.
That due diligence speaks to how United Technologies applies a more demanding degree of financial rigor to corporate real estate than many corporations do, according to Treichel.
“There's been a realization at the C-suite level that real estate may have been considered a dead asset — you do a deal once for five years and you never see it again,” says Zappile.
“But when you look at it on a consolidated basis, there are deals going on all the time. So it really is a live asset, not a dead asset.”
John Egan is an Austin-based writer.