by Beth Mattson-Teig — At CoreNet Global’s North American Summit in Washington, DC in October, CFO Research and IBM revealed the findings of a their collaborative report with CFO Research titled, “Working Smart: Value Management for Corporate Real EstateWorking Smart: Value Management for Corporate Real Estate.” The report polled 150 senior finance executives from companies with annual revenues in excess of $1 billion. Its aim: to shed light on what real estate means in terms of overall business performance, as well as what corporate real estate (CRE) professionals are being asked to deliver in the short term—specifically, over the next three years. This article examines some of the highlights from the report and the Summit panel discussion.
Many corporations continue to face the dual challenge of continuing to manage managing real estate costs, while also planning for new expansion. “The business agenda has shifted. We have exited the era of cost containment and cost reduction. A majority of organizations are now fueling up for growth in their respective industries, and I think that brings a new set of challenges for corporate real estate,” says John Clark, Worldwide Category ManagerProgram Director, Integrated Workplace Management SolutionsSmarter Infrastructure for IBM. Clark led the panel at the CoreNet Global North American Summit. in Washington, DC that discussed survey results.
Traditionally, the top priority for CRE has been securing the lowest cost per square foot. However, the research survey shows that corporate leaders are placing more emphasis on the strategic management of these core assets. For those respondents who acknowledge that CRE makes a meaningful contribution to their business, more than half (56 percent) say that the most important objective for their real estate functions is related to growth, either through expanding their business (23 percent), improving profitability (21 percent) or increasing revenue (11 percent).
Preparing for Growth
Companies are growing in different ways, whether it’s is expanding into new markets or growing operations. Real estate professionals are working to bring as much data as they can related to the operational and financial risks as corporations approach those new endeavors, notes Chris Pesek, Director of Facilities Management at JLL and a Summit panelist. “I think we are really changing from being order takers to getting more and more information and being asked to help develop strategy, whether that is just challenging the status quo or bringing in business acumen where we can understand where the business is going as a whole, and what types of options and scenarios we need to develop to relate to that,” he addssays Pesek.
After years of belt tightening to weather the global recession, many organizations are now preparing for geographic expansion. More than one-third of respondents (36 percent) expect the number of real estate assets their companies maintain in North America to increase over the next three years, while 32 percent foresee an increase in China and 28 percent predict growth in Central/South America (other than Mexico).
The question for CRE is how to be more effective in helping to manage and facilitate that expansion. General Electric (GE), for example, has made a move in the last few years to decentralize its organizational structure. The company’s CRE team now works directly with regional CFOs who are responsible for growth in a particular region. The conversations GE’s CRE team is having with the CFO is not just one individual, but from a business unit CFO perspective and a regional CFO perspective.
One of the keys for a company such as Red Hat, Inc., which has experienced significant growth over its 20-year history, is speed of delivery, says Louise Dixon Chapman, the company’s Global Senior Manager of Workplace Planning for Red Hat, and a Summit panelist. The CRE department is in constant contact with the CFO to make sure it is coming up with good cost solutions and business cases. “Having that speed to delivery is the main requirement,” Chapman adds. “Another task is educating the finance teams to understand what we are trying to put into our workplace, what we are expected to provide and at what cost.”
Pressure to Cut Costs Remains
Cost reductions still remains an important focal point for organizations. Nearly seven in 10 respondents (68 percent) say that CRE will provide either a substantial (eight percent) or a small-to-moderate (60 percent) portion of their companies’ total cost reduction initiatives, while another seven percent of respondents say that they have already reduced their CRE expenses. Only 19 percent of respondents are not considering any programs to reduce CRE expenses. Overall, respondents estimate that CRE will account for an average of nine percent of the total dollar amount from all of a company’s cost reduction initiatives.
GE, for example, is being asked to cut 20 percent of its total office spend, including new growth, by 2017. Ultimately, that solution lies in being as aggressive as it can in developed markets to reduce the amount of square feet per person through consolidation, putting more workplace centers in place and developing “out-of-the-box” solutions, notes Kontra. The vast majority of the company’s current real estate expenditures, about 80 percent, is concentrated in developed markets, primarily the U.S. and Europe.
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Such cost cutting has been at the forefront for many organizations for the better part of the last decade. However, most of the “low-hanging fruit” has been harvested already, notes Pesek. “So, we are looking at new areas where we can adopt new technologies and understand different opportunities based on information that we are bringing in,” he adds. Data and analytics are playing a bigger role in uncovering potential savings. Some clients also are pushing the envelope by leveraging their own pricing power to negotiate more favorable deals with vendor agreements.
It is important to note that finance executives in the survey are equally likely to prioritize cost management and value optimization. Half of respondents selected reducing facility operations and occupancy costs as one of the top three objectives for CRE, and nearly as many (47 percent) selected improving utilization of real estate assets. At the end of the day, business is going to drive the real estate decisions, but at the same time real estate departments are held accountable to be efficient and get the best rates possible given the market conditions, adds Kontra.
About the Author
Beth Mattson-Teig is a Minneapolis, Minn.-based freelance business writer and editor who specializes in commercial real estate and finance topics. She writes both articles and white papers for several U.S.-based trade and business journals.