The following is an excerpt from an article pending publication in CoreNet Global’s CORPORATE REAL ESTATE LEADER.
With many of today’s companies struggling to weather the storm in a difficult economy, the C-Suite is looking to cut operational expenses and trying to adopt a social responsibility strategy recognizing “green has become the new black.”
Realizing real estate comprises one of the top two or three largest impacts on their financial performance, the three important questions senior management are asking their corporate real estate/facilities executives are:
- “What is our total cost of occupancy?”
- “How can we reduce it?”
- “How can our real estate assets serve our organization’s operational needs and contribute to our company’s desire to achieve environmental stewardship?”
Tough questions? Maybe, if the CRE professional doesn’t have access to the information needed to identify areas where costs can be cut. The first challenge in the equation is determining the cost categories that make up the “total cost of occupancy.”
A great place to start is by taking a look at the International Total Occupancy Cost Code developed by London-based IPD Occupiers. The code includes over 250 categories organized in the five super categories of:
- Property Occupation (Rent, taxes, acquisition, debt service)
- Adaptation and Equipment (Fit out, improvements, capital investment)
- Building Operation (Energy/utilities, maintenance, repair, moves, churn, security, cleaning)
- Business Support (Reception, catering, mail room)
- Management (Fees for real estate, facilities and project management)
The next challenge is to determine where, within the enterprise, the information resides and be able to summarize and standardize the information across the portfolio of leased and owned properties. Once achieved, (no small feat given the resources available to the CRE professional and silos of information that exist in many organizations) the information is collected, analyzed, and prioritized a benchmark can be developed and the “bigger buckets” targeted for the greatest degree of cost savings.
The information then becomes actionable business intelligence that can be used as a foundation of a strategy.
In typical organizations, the top ten cost items for a leased facility are:
- Net Rent
- Rates (local property taxes)
- Total utilities (energy + water)
- Total repair & maintenance
- Total property management
- Total cleaning
- Internal & external distribution
- Service charges
- Catering & vending
“Think, Build, Operate”
With the total occupancy costs calculated and a cost benchmark established, the CRE professional can now answer senior management’s question #1.
To answer the subsequent questions, the CRE department will need to put together a strategic plan. Through facilitated sessions with internal constituents and outside consultants the process will help to develop a plan that will get the organization to “crawl, walk and then run.”
Along with a consultant CRE departments will co-develop a strategic and tactical solution unique to the organization might utilize a process driven approach that will challenge the internal team to:
THINK: What is the real estate portfolio’s current and desired future state?
BUILD: What are the specific initiatives to be implemented across the real estate/facilities department(s) and portfolio that bring about the desired efficiency, economic and environmental sustainability results?
OPERATE: How/who will implement the plan, what will become the KPIs to measure progress and define success, and how will the momentum be maintained until the desired future state is reached?
Departmental and Portfolio Efficiency
At a departmental level, in order to effectively bring about change, the CRE professional needs to be realistic about ‘where they are’ (current state) and where the enterprise ‘wants to be’ (future state). Is it simply to reduce operating costs, rationalize your portfolio, dispose of non-core assets or something much more?
A key component to determining whether the organization will be heading in the right direction is to articulate the KPIs they will use to assess the portfolio and processes and help them manage change. These KPIs become the “gauges on the dashboard” and determine how to measure success and whether they are driving costs out of the portfolio.
But, before addressing the overall portfolio of leased and owned facilities the CRE professional will be well served to look in the mirror and examine the internal business processes, departmental core competencies and the role outside service providers play. Getting the management piece addressed is the fundamental component can be streamlined and improved to set the efficiency train in motion.
At this stage it’s best to incorporate a plan of how to orchestrate the “people” (who will implement and affect the desire results?); the “process” (what are the workflows that will be refined or developed that will become the framework for making and managing change?); and the “technology” (how will the use of technologies help the organization measure, manage, automate, and report on portfolio/building information about occupancy costs that will support strategic decision making?).
Tackling the low and high hanging fruit of the economics of the portfolio
The next piece of the puzzle is to identify and implement the specific initiatives that begin to carve out costs. The most efficient building in the portfolio is the one you no longer use because you’ve disposed it. While every organization is unique some common threads of initiatives to cut costs could be:
- Deploying alternative workplace strategies
- Addressing operational efficiency of your owned facilities
- Reducing energy consumption
- Evaluating and executing leasing strategies into commercial properties that can contribute to your company’s sustainability goals
- Decreasing the utilization of expensive facilities with space management designed to show vacant and under performing facilities
- Developing the visibility into your under performing facilities
- Rationalizing your portfolio and consolidating staff/facilities to dispose of non-core assets
By effectively managing the size and cost of the portfolio, real estate executives can have a dramatic impact to their organizations’ bottom-line and profitability while contributing to corporate social responsibility (CSR) initiatives important to many companies today.
The ‘holy grail’ – achieving environmental sustainability
In today’s new economy the challenge has become how to maintain profitability while moving your organization toward environmental stewardship.
While the debate about whether climate change is truly caused by the emission of greenhouse gases continues, it is clear that adopting environmental sustainability initiatives can contribute to the positive financial performance of the company.
Some of these practices that involve operational efficiency include:
- ‘Green’ and LEED certified design practices
- ‘Smart’ building systems
- Energy demand/consumption
- Use of renewable energy sources
It makes good business sense to adopt these enviro-friendly principles because it reduces costs and moves the organization toward societal responsibility of the environment. While “green has become the new black” it no longer means it creates “red ink.”
In developing a sustainability strategy plan the blue print starts with determining the overall sustainability goals of the organization and identify initiatives are already in place to address sustainability.
A contributing factor to company’s CSR strategy is for the CRE professional to bring the real estate perspective by:
- Evaluating the financial and environmental impact of capital investment decisions focused on resource consumption and carbon efficiency
- Outsourcing non-core services to ‘green, cleantech’ providers
- Streamlining and ‘greening’ departmental workflows
- Automating corrective and preventive maintenance schedules and alerts to maintain facilities at peak resource and energy efficiency
- Establishing carbon disclosure reports and creating sustainability scorecards
- Exploring the feasibility and benefits of alternative and renewable energy sources (solar, wind, geothermal, hydroelectric, Co-generation, etc.)
By achieving greater efficiency of business workflows and facility operations, carving out occupancy costs and implementing environmental sustainability measures not only makes good business sense but, it’s the right thing to do for the environment.
Back in the day ‘tree hugging, do gooders’ were pushing for recycling, turning off the lights, adjusting the office thermostat and copying on both sides of paper. Being good to the environment seemed like an expensive nuisance. Now? It makes fantastic business sense due in large part to the fact that, “you don’t pay for what you don’t use.”
What do you think? What are your ideas of how you could implement cost avoidance initiatives that support an overall real estate strategy and help you don’t pay for what you don’t use?