by Robert D. Kugel CFA |
1/4/2008 | Article ID: V08-01 | Article Type: VentanaView
Summary
From a financial analysis standpoint, real estate is always classified as a fixed cost. Strictly speaking, that’s correct, but looking at it this way leads to an attitude that causes many organizations to overlook opportunities to manage their real estate and other occupancy expenses more to their advantage. In industries where occupancy or ownership costs account for more than 15 percent of total business expenses, taking a more active approach to managing real estate and occupancy can boost a company’s profitability. To achieve a higher return from money spent on corporate facilities, however, requires some organizational and process changes. Software is available that can help companies do a better job of analyzing, understanding and controlling this expense.
View
One of the more powerful transformative contributions of information technology has been its ability to change what once seemed to be immutable constraints on running a business. Often, the connection between these advances and technology is difficult to see because of the inevitable lag between the introduction of new capabilities and when they are applied to produce better processes. For example, companies do a far better job of managing inventories of physical goods than was the case a generation ago; computers made lean inventory management feasible for average organizations. Similarly, over the past two decades business processes have evolved as new categories of applications appeared and as the scope of information available for analysis and decision support has broadened. Managing real estate facilities and expenses is one of these areas where, catalyzed by technology, companies often can save money and work more effectively with suppliers and customers.
Strictly speaking, real estate is a fixed cost. For many companies, this means that they rarely spend time considering their options for reducing this expense or making better choices of locations and facilities. Industries in which occupancy costs are one of the top three expense categories, such as retail sales or consumer-oriented financial services, have departments responsible for managing leasehold costs, site selection and other aspects of occupancy; they pay attention to managing these costs and ensuring they operate at the sites most advantageous for revenue generation. In contrast, other types of businesses regard real estate as a low priority, even though it is an expense they could manage much more effectively (for example, by locating closer to customers or suppliers).
Even if a company is not a big retailer, it may still have a substantial number of offices and other leased locations. Add them all up and for many larger corporations there is a sizable opportunity to do a better job of managing the utilization and cost of all of those locations. Yet most tend to distribute responsibility for handling these sites across divisions or business units. This approach can make sense from a business use standpoint, but it doesn’t preclude companies from harmonizing their real estate management centrally. The purpose of having such a central real estate support function is to support all of the business units’ real estate decisions, to monitor and manage enforcement of lease terms and conditions and to enable a longer-term, more strategic approach to occupancy and facilities management. But even companies that have some centralized real estate functions often lack the capability to provide this kind of support to local decision-makers.
For example, we find that many companies could make better-informed decisions about arranging or renewing leases. Typically, the individuals who are responsible for a particular site or business unit rely on brokers to keep them in touch with real estate availability and market conditions. While brokers can provide valuable services, they may not know (or provide) all the information that is appropriate and available. Software that taps into commercial real estate databases can provide insight and analysis that will enable companies to negotiate better terms than they might otherwise. Moreover, once a lease is negotiated, companies typically do not follow up on all of the provisions that can save them money or fund improvements.
Software is a necessary component in offering centralized facilities support to business units or divisions. Spreading the cost of the software purchase across the entire organization can make it more efficient. Migrating the process away from a spreadsheet-based manual approach can make it more effective. Dedicated software can ensure that processes are handled consistently, deadlines are anticipated and follow-throughs are performed. Software designed specifically for managing real estate has many of the routine functions users need to do these things. Often, they enable better practices than most companies are using.
Assessment
Many companies watch their real estate expenses, but most do not have the methodology and capabilities need to manage them well. In some cases it may make little difference, especially if a company’s occupancy costs are a small percentage of operating expenses, or if they are situated in only a few locations. However, many Global 2000 companies, even those that are not in businesses that require them to manage a large number of retail sites covered by complex leases, can benefit from taking a more strategic approach to managing their occupancy costs. They can reduce their ongoing costs and have sites that better suit their needs. Ventana Research urges all companies to examine their real estate management practices and explore whether real estate management software could improve performance.
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