Although it remains an important part of a corporate balance sheet, corporate real estate (CRE) often receives little attention from the CFO. Typically managed by a company’s various operating units or a separate real estate function, its impact on a company’s strategic goals is not always apparent. The commercial maintenance and asset viability of CRE are under fresh scrutiny from CFOs – who are under pressure to improve financial performance – many of whom have concluded that it warrants personal attention.
Real estate does not just represent the physical space where work is produced. It is the home ground of interaction where customers communicate firsthand with the brand. It is where commitments are made.
Consequently, the standard of CRE affects productivity, brand perception and staff morale. Most organisations are hamstrung with too much real estate, which is often not of the requisite quality to support modern work styles and brand perception. Businesses on average have 30 to 50 percent more real estate than they need, and this excess stunts financial performance.
Strategic planning of CRE
While the CFO’s role has changed from being the gamekeeper of financial results to one that has greater involvement in strategic planning, many finance chiefs are learning that a weak CRE strategy can hinder growth plans.
The CFO also faces the hurdle of having a lack of consolidated information about company real estate holdings, while there are conflicts between the CRE strategies of business ensue. All in all, poorly managed CRE becomes a business risk. If facilities are acquired and operated by branch or field-level staff, companies often fail to conduct a rigorous assessment of potential legal liabilities or property-related hazards. Worse still, they may even fail to develop contingencies, exposing themselves to risks such as disruption of operations, employee health and safety, and IT system vulnerability.
The CRE function, therefore, should not only be technically competent but also needs to take the initiative when it comes to finding new opportunities for cost savings.
Areas of savings can include the bulk purchasing of furniture and equipment, identifying leases that are due to expire and renegotiating them, looking for opportunities to consolidate holdings across the portfolio, and the disposal of excess real estate.
Integrated approach
Regaining control of CRE is no easy task, but the financial benefits – as well as the positive impact on employee productivity, morale and brand perception – can be significant.
A major concern for the CFO is that CRE planning is seldom well integrated with corporate strategic plans. Integration is not equally important to all companies, of course. For a distributor, CRE may be a relatively straightforward matter of securing inexpensive warehouses. However, for other companies – including companies with a strategy that calls for expansion or cost cutting – real estate is a more complex and important consideration. Outsourcing extra CRE resources must also be considered as a means of generating income.
Centralised CRE can provide the CFO with the real estate data necessary for managing corporate financial property. To do this in the most efficient, value-added way, meetings should be held bimonthly and include senior members of the business unit, the CRE and the CFO.
A few strategic changes can make CRE effective. Organisations need to confront important questions about workplace and facilities strategy which should be set off by a comprehensive review of the demand for space.
Along with defining or refining the corporate stance on work style, the role of mobility, and workplace density, it can achieve a huge reduction from typical space footprints. Organisations need to build a central database that captures all leases and facility services contracts in order to bring real estate-related spending within the scope of professional management. This facilitates central visibility of the portfolio, in line with the business demand for space use.
Once this demand has been clearly defined, it is important to brief and incentivise CRE teams to work closely with procurement and operations. Procurement teams are in a position to create stronger policies and strategic plans to support the sourcing of property service and management supply chains to utilise economies of scale between CRE teams and suppliers.
Although field services contracts can make savings, the biggest gains can be made by reducing the total footprint and eliminating recurring cost streams. Net upfront cash is boosted by disposing of assets, and also eliminates recurring cost streams. Consolidating multiple locations in one city or region, or deploying flexible working policies reduces square footage and can also resulting in workforce benefits like increased morale, enhanced collaboration, better work-life balance and improved productivity.
Part of the reason that organisations overpay for facilities services is that the management of services contracts is frequently left to local office managers or even administrative staff. This includes everything from janitorial services to security and even lease management. As these contracts are often handled in local departments, there is a lack of global visibility to services contracts, and often no visibility to important items like leases and their terms. Common mistakes that result from this approach include one-off deals and leases that do not support future corporate changes or activities. When it comes to improving facilities management, the first step is to start with service specification. This means looking at outcome-based metrics rather than determining exactly how a service should be performed. Concentrating on outcomes can open the doors to more supplier innovation and best practices, as opposed to them inefficiently fulfilling service requirements.
All in all, to get the most out of CRE, CFOs need to guide their companies over a range of hurdles including fragmented management structures and a lack of accurate, consolidated real estate portfolio information. Depending on the company, this may call for a centralised structure, the use of technology and outsourcing, and a concerted effort to bring real estate issues to the company’s strategic planners. Ultimately, the main benefit of effective CRE management is to free resources that are tied up in real estate and allow the CFO to reallocate them to revenue-generating areas of the business such as employees, sales and marketing, or manufacturing.
