Today's corporate real estate executive must rely on the latest information systems and information-gathering techniques, better manage the real estate process and continue to foster an open dialog with the upper-management team and chief financial officer to realize success in the years ahead.
That was the loud and clear message from a recent one-day intensive meeting of corporate real estate professionals. The Jones Lang Wootton-sponsored event, called the 1996 Corporate Real Estate Leadership Forum - Global Visions, was held at the Ritz-Carlton Hotel in Chicago. Ultimately, it underscored the importance of the corporate real estate profession as well as identified many key trends that will impact the future of how the corporate real estate function is addressed.
Four key areas were covered in detail, based on topics suggested in advance by the participants: Asset management, global at lease administration, outsourcing and benchmarking. Each area was facilitated by a JLW director.
For ease of use, we've organized the following material to correspond with the event's format of structured discussions.
Asset management strategies
At no time has the role of the asset manager been more critically important than it is today and in the future. As corporations move through the downsizing and rightsizing phase, attention increasingly is shifting to an emphasis on a return on assets management strategy.
"Definition one of asset management is managing the intrinsic real estate value of an asset in addition to managing it as a facility in order to enhance shareholder value," said Steven Scruggs, managing director of JLW USA in New York.
"A corollary definition is the asset management function is providing the required facility at the lowest lifecycle cost. The reality of the cost on an asset is composed of three general pieces: the acquisition cost, the operating cost over its use to the firm and the return on disposition," said Scruggs.
Dan Busch: Our biggest challenge is taking the asset management strategy and aligning it with the business needs. I think we've all been scared to death over the last few years about all of the changes we've had to make. We spend less time doing actual transactions and more time with the business people trying to align what we're doing from a strategic sense.
John Crisel: We use Economic Value Added (EVA). We've made some internal rules of asset utilization so that you don't start to play games with various business units, and that's been very effective in raising the importance of asset utilization. Before long, you get a ton of internal customers talking about what they need and they do not have to charge for those assets.
Richard McBlaine: It provides managers a tool to look at specific operating units in the larger company.
Note: McBlaine defined EVA as net operating profit from a particular business unit minus the cost of capital required for that particular unit.
Arthur Martin: We call it Shareholder Value Added, and it could be a double-edged sword. It does get people focusing on these assets whereas before they used to think of them as a cost and it's a place where we do what we need to do. On the other hand, because it starts getting to be tied to bonuses and what not, and you may have corrected for off-balance sheet leases and so on, you still get people thinking this affects my bonus and I want to get rid of it one way or another, whether that makes sense from an asset management point of view, it starts to get people rushing to the idea of looking to get rid of this because it's going to cost me somehow. I don't know all of the implications of that yet.
Scruggs suggested using a cash model for the management of real estate assets. For example, first you "find all of the cash," the flow of funds in and out of the company. Then you determine your cash needs. The cash manager then balances the market-driven cost of available funds with the company's own cash needs, using a portfolio concept, that produces the lowest overall cost of cash. Then that portfolio is monitored continuously.
Note: All participants agreed that inventorying the property is the first vital step in any good asset management strategy.
Michael Haddad: It's very hard to make those changes occur immediately. It takes time to let them know that they can trust us to help them do their job better. Maybe if we made that asset more productive. Look for optimum use rather than maximum use, so that when you're done with the asset you can get some money back for it. In the six- or seven-year meantime, you do have people running around signing leases, disposing of property.
Alex Darragh: Typically at Amex we had a pretty good handle on what real estate assets we own and lease. The two hard parts are: 1. We know what the lease payment is, but we don't know what the operating costs are because that's typically paid by the local business unit. 2. We talk about being more strategic planners to the business units, but the big barrier that we have there is the corporate accounting system, actually getting information on the business units by facility. It makes it hard to put together the desire to be a planner and work with them and look at their portfolio not only from a real estate but also a business unit standpoint if you can't get the right information. That's a big challenge we find.
We don't even have a common definition of occupancy costs among all the different business units. We're now trying to measure and define what is usable space and measure at least all of our major facilities in the same way.
Karen Horan: We're in the process of compiling a database of properties, going out to all of our locations and getting down to the market rents, how many desks how man workstations. Once we get all of this it will be interesting to see how we compare it to one another.
Darragh: Whether it's insourced or outsourced, you still have to devote the resources to it. We're in the middle of making that decision now. You also need people in your real estate group to chase down other information and make sure that you've got the linkages to the facilities management guys and the design and construction guys who know where all the people sit and where all of the desks are. The facilities are up on CAD and you can link that data with your lease admin. data.
John Quinn: The problem we're running into is that information is king, and without that information it's very difficult to demonstrate to senior management that it is a worthwhile strategy to buy into, but without that management support it is very difficult for us to gather the information from the subsidiaries that resent most times any intrusion from the corporation. So we find ourselves in a Catch-22 - without that support we can't gather the information, and without the information we can't get the management support.
David Harris: We track down to the allocated square footage per empoyee, but it's a labor-intensive job. One of the challenges with a non-regulated business like cellular is projecting growth.
Darragh: The big unknown is market demand. Business units aren't willing to commit to more than two years. The investment side of r.e. has done a lot more in getting information, understanding what their portfolio is, understanding what the common benchmarks are. In corporate real estate we're either having a hard time defining benchmarks or we're having a hard time getting the information.
While it's great to manage the real estate, you also have to manage the business. In our company, 70% of our operating costs are labor, so sometimes we'll make a lousy real estate decision to get into a good labor market.
Barbara Moore: Obviously we have to align ourselves with the strategic direction of the business, but it's becoming more and more difficult to be able to manage the portfolio because of all of the changes in the strategic direction of the business. That only underlines the need to have good information systems and forces us to keep that information up to date because only then can you be able to react and look at your portfolio based on the new business plans.
Haddad: In an era of very profound changes, I think you can see that singular real estate deals no longer stand on their own but that they interrelate with all the other real estate deals that the organization makes. You always have to have a plan B in place, just in case your Plan A is faulty
Global lease administration
Now that most companies are taking a global view of their business opportunities and expanding into many foreign markets, the importance of administering leases has become higher than ever. For many corporate real estate executives, it presents an additional concern, since administering leases for domestic space often proves problematic enough.
Good lease administration starts with an information database as its foundation, said C. Stephen Cordes, managing director and lead partner of investment management for JLW USA.
Haddad: With all of the information just waiting there to be looked at, it's tough to get to and it's time-consuming.
Jim Sneddon: You have to set some parameters for what you want the database to be, and you don't want to set up redundant databases if the information is already in another database. You first have to define what you want in a real estate database and then see where you can get other information on occupancy costs. You may not track all your occupancy costs in the real estate database, but you may have that in the general ledger database, and you may be able to link the two.
Busch: If the information isn't used as a living, breathing document, it's no good. We actually take our corporate admin. system which says where paychecks are sent to people and seats, which is a real number, and tie that to square footage per person.
Q: How do you set up a good system?
Sneddon: You have to put a well-defined structure and process in place so that the information just naturally flows back into you. and you have to put checks and balances in and keys to the gate in some areas so that it doesn't bypass you. If you don't do that, it's going to be a week old.
Darragh: The other part of lease admin. is really documentation and control. You can't get a lease approved unless you have the lease abstract form filled out, and you can't sign it unless it comes through our group and therefore it gets entered in our database. A lot of those approval forms have our benchmarks on them so that we can compare on an annual basis the transactions how they compare to the current state of the portfolio.
Domestically, American Express has set up an FRC (financial resource center) that pays all of the domestic operating bills. We have someone down there with the people who are paying the bills and reviewing them. So we feel pretty strongly that domestically we know what that is. Where it breaks down is when you get back to the corporate accounting systems. Not all domestic business units feed into that FRC. And while there are international FRCs, not all business units are in there and not all real estate charges are paid through the FRC. So we're trying to set up linkages with the finance organizations.
Sneddon: The problem that we have is that our general ledger financial systems do not drive costs down and identify them specifically to a building.
Denis Kavanaugh (JLW international chairman: What I hear on a worldwide basis is that most companies are desperately trying to reduce bureaucracy and reduce unnecessary controls. So the whole key is how do you demonstrate internally that this system pays for itself and is a value-added procedure. When you first set the thing up there is a big hit, so you have to make sure what you've got left is sufficiently streamlined and inexpensive so that it continues to justify itself.
Sneddon: I don't think you can be a good asset expense manager unless you have a solid information base to work from. The lease administration is just one piece of the pie as far as demonstrating to management that you know what you're talking about. You can show management you're coming to them with fact-based solutions. It's starting to spread around the company that real estate has a database and they're starting to come to us.
Haddad: But at the same time the real estate department is the only staff entity that makes money. We dispose of properties that make money. If we can use the fact that we are bringing in millions of dollars in the sale and distribution of properties that the other staff support groups don't do, it will seem a little more clear as to the benefits we can add.
Kavanaugh: There has to be a constant process of continually justifying why you are doing something, not in a generic way but in a finacial way.
Q: On the international front, things get more complicated with currency changes and different standards for measuring square footage per employee.
Kavanaugh: There are a number of nightmares in Asia. The real estate issues are fighting with the business joint ventures. The reality is you don't have any control over the real estate anyway. The great danger in having too much data is you don't know what to do with it all. It's so unwieldy that you can't do anything which produces a positive result.
Darragh: In Asia, we don't have a full understanding of what kind of real estate we really have there. We think we know, but it would be a good place for an audit.
Q: Where is technology now?
Thomas Morse: It's changing on a daily basis. They're getting better. They're getting cheaper, more user friendly.
Kavanaugh: One of the issues that comes up quite often, in situations where companies are centrally controlled as far as the U.S. is concerned, when you then start to deal with overseas businesses there's a temerity about getting too far involved. You've got somebody over there who's running a business in an entirely different business environment and do you want to get half pregnant with responsibility.
Darragh: Where technology is concerned, we look at leased versus owned. Do we want to buy the software, maintain it and update it. Or do you outsource it and get somebody else's technology and make your outsourcing partner deal with the updating, training and development of new technology to make sure you're on the bleeding edge. That's the trade-off we look at.
Sneddon: I don't think, with the diversity of companies and the way they operate, that you're ever going to find a system that works for everybody. You have to find a base package that does the things that you want it to do. And if it doesn't you customize it. We bought a base package, we customized it and put in the international features and we grew with it.
When to outsource and managing it
"Outsourcing seems to be a trend that's here to stay," said Debra Moritz, a JLW senior vice president of corporate real estate services.
Moritz provided a minimalist definition of outsourcing as delegating to a third party the responsibility and authority for managing and operating a portion of the business at an agreed-upon fee for a specified period of time.
Darragh: In our justification (for outsourcing) we point to productivity. We deal with cost and service. Our cost as a real estate group in comparison to occupancy costs is minor. We stay away from cost and deal with productivity.
Kavanaugh: There are certain aspects of our business that are essentially commodities. It's the other areas that are hard to measure. The whole key in measuring is, is there some value added.
Darragh: It comes down to the selection process. How you go about selecting the service provider is all aligned with your goals for the corp. re group.
Q: So, is cost always the No. 1 factor in deciding to outsource?
Martin: Cost is never the first item. It's not going to be a cost-driven matter. It's things like sending a message which is "faster, faster." The chairman wanted to tell their employees that they would be focusing on their core businesses, they wanted to reduce the overhead in their corporate headquarters, plus by choosing who they felt was a good supplier they would get access to some of the world-class services. Cost was like 10th on the list.
Q: Is management focused on quantifying and qualifying the benefits of outsourcing, or are they just saying you will do it?
Haddad: It's a real simple decision, is it better, cheaper and faster? It's not complicated. Where it gets complicated is in deciding how and what you want to do.
Ahsan Hafeez: In the last five years we have gone through some very tense merger activity. Five years ago we had 10 offices. Now we have 125. How do you keep pace with that? I have three people on my staff and two in New York. We have outsourced a reasonable share of the business, but we manage the portfolio ourselves. In September we are buying another bank with about 35 offices. I've got to respond to that and make sure I incorporate all of the real estate into my portfolio on a timely basis.
Crisel: That's a relationship you nurture. Obviously real estate is not our core business. And you treat those folks (outsourcers) as professionals and work with them.
Kavanaugh: The outside firm is moving away from just being an order taker. It's more of a "how can you help us and come up with your own ideas to help our business?" You have to have a relationship which is founded on not shifting sands but something with a degree of permanence.
McBlaine: I think the verbiage and terminology is grossly misused in our industry. People mix up strategic alliance which I think implies sharing of risk and reward to a certain extent, with outtasking and with preferred provider arrangements, which are very different.
Lambert: One of the things we've looked at is what is the service objective. If the service objective is principally cost driven alone, then in many cases more traditional relationships make sense. We see a big difference. We do see a spectrum which is consistent with other business areas. It's important to really analyze what the service objective is and what the relationship is constantly.
Mike Rogan: We're studying this very carefully right now because we have no centralized program in place. Speed is of the essence here and we're spending a lot of time meeting with service providers trying to figure out how they will best serve us. What I'm finding meeting with all of these service providers is that they all have strengths and weaknesses. We're not going to have a preferred provider, we're going to have preferred providers. Throughout our global portfolio we're going to have a lot of individual transactions - we're going to develop property, liquidate property, we're going to redevelop property. The problem I have is it doesn't seem like in this industry you have an RFP process where you go out to three or four service providers for a piece of property and say "give me your proposal." The times I ask them to do that they freak out. I want to know how to maximize the value of that property and determine its best use.
Busch: It's because the market's changed so much. They're reacting to you the way they used to. You're asking them for a lot more than they've ever done before.
Haddad: We went through 40 firms, and only two responded in a way we felt comfortable.
Q: Many firms have taken outsourcing tasks back in-house to cut costs and increase response time, etc. How can we (the group) do a better job of managing our service providers?
Darragh: When you think about it, those are the very same reasons people outsource.
Kavanaugh: In the early days of outsourcing, a lot of the functions that were outsourced never should have been outsourced. These days, people are thinking much more carefully about what things absolutely need to be in-house and what things should be done outside. Also, if you get some type of routine management forum to review things on a more timely and frequent basis rather than just letting the thing run. It's a two-way street. You're trying to make the thing work efficiently to give mutual benefit.
Sneddon: You need to define and manage mutual expectations. If you don't do that, clearly you are doomed to failure.
Q: Anybody measuring their outsourcing effectiveness?
Darragh: We interviewed a lot of service providers to get an idea of what is the current state of the art in outsourcing. What the industry told us back was that unless the service providers really understood what the company wanted and clearly identified how we expected our business to change we would never get the kind of service that we were demanding. We've set up the selection process such that we're telling everybody everything. Like we manage anything else,. we have to continually evaluate that since it's going to change on a regular basis.
Q: How do you prepare for your own cyclical business?
Busch: Have a single point of contact in your firm, because you're going to have bumps in the road and you need someone there to manage that. When you do that you can sit down and plan and see what's coming up a little farther ahead. You can get more into the problem-solving.
McBlaine: There is a trend toward lead integration where you're now pushing the process out. For example, instead of an in-house corporate real estate executive managing an outsource service provider who finds the space, then gets a construction project builds out the space, and perhaps yet again a furniture vendor who fits out the space, that you go to an individual who an integrator for your firm and provides a delivered solution.
Lambert: There's much more analysis UP front, on the other hand lengthier and much more in-depth in terms of what people need to demonstrate. A piece of it relates to really being able to demonstrate measurable results, and be willing to make those commitments up front. It's a fairly experimentational and evolving process.
Best practices comparisons
McBlaine: Best practices comparisons are the next wave in corporate real estate management. It means the best approach to the management and implementation of a particular activity, a constantly evolving, focused process map that is defined by the best-in-class activity. What you're going to measure yourself against is the best possible delivery of that service, whether it's in your own organization or outside. It goes beyond benchmarking. It's a process.
Lambert: People are paying a lot more attention to performance measures. In addition to benchmarking, I think it's the issue of performance measures in general.
Note: Busch said EDS hired HOK Consulting to benchmark against its competitors. HOK measured the space and looked at floor plans, then made usage comparisons. This provided good insight and better credibility than an in-house study. Also benchmarked against other companies in Texas (a group of Texas companies formed a sort of benchmark think tank). "But you have to meet regularly in order to get something out of it," said Busch.
McBlaine: One of the problems we find is that a lot of comparisons are sort of apples to oranges data. What is the value in that? If people haven't been careful about very specifically defining the data while they're going through the benchmark work, the results are questionable.
Q: Is the importance of benchmarking coming down to process versus metrics?
Busch: There's a lot of good dialog around why people do what they do.
Darragh: We use benchmarking for locational strategies. Were are different companies locating their facilities? What are the benefits, what are the risks, when did they do it, why did they do it? Centralized, decentralized, how did they get there? If you look at that, hopefully you can get down to their cost for delivering the same service as we're looking at delivering.
Q: How is your management measuring your performance?
Tom Quinn: We operate the department like a small business, with a mission statement of what we do, what our charter is, and each of us has our key objectives. We talk about property management fees, about acquisition fees. We talk about best practices, what it costs outside versus inside. But I'm struggling with how do we determine that our practices are really best in class.
Hafeez: We are measured on all of those things, and that becomes the benchmark for the following year. The COO is asking how much it is costing per square foot per employee. So we've got to have those numbers ready.
Q: The real estate markets have been working in corporate real estate executives' favor. Flexibility of leases, shorter terms, renewing leases at lower rates, reducing occupancy expenses. That's going to change. Are you all working any other measurements into your numbers?
Rick Powell: We don't have a lot of leased space. We deal mostly in acquisitions for manufacturing sites and buying buildings for offices in other countries. The measurement of how well you do on acquisitions is based on how much I told Mr. Wrigley it's going to cost and what I brought it home for and how much the fees were for having somebody help us do that.
Darragh: We're trying to have communication at all levels of the organizations. We try to be the department that talks to all three levels (international, regional, country) to see what the conflicts are. We try to be as plugged in as we can be.
It seems that historically corporate real estate departments were viewed as service organizations. Now there's a lot of discussion about raising the level of the game to be more of a strategic partner and a business decision maker. But I don't think the two are necessarily in conflict. Where the conflict arises is, we report to the CFO, and one of the keys is senior management looks at us as an extra set of eyes and ears as a watchdog, making sure there is a business case for that new facility. On the one hand you have to have a good relationship with your client and get them to take you into their confidence, and on the other hand if there's not a business case you're blowing the whistle, and we've stepped all over ourselves on that one.
Ultimately our client is the CFO. We're up front with people when we say the whole purpose for our group is that it's got to make sense from a blue-box economic standpoint and some people are willing to accept that and some aren't.
Q: What are your benchmarks for doing a good job?
Moore: Now we're getting back the responsibility that had been delegated to AT&T. At AT&T we focused mainly on square foot per associate. The big emphasis was on getting the square foot per person down to a lower number. The assumption was that if you did that your costs would be lower, but that's not always the case.