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Getting to grips with your property costs

Property costs represent one of the largest contributors to companyoverheads, yet despite this they have been shrouded behind layers oftechnical jargon making it impossible to create effective strategies forproperty management.

Property is the second or third largest cost contributor to overheads for nearly all businesses, and yet it is rarely subject to the same rigorous analysis given to other important factors affecting the profitability of a business. In their search for added shareholder value, in an increasingly competitive marketplace, senior executives need to be able to get to grips with their property commitments.

Effective strategic property management, and this doesn’t just mean cost cutting, can increase your company’s efficiency and quickly make a direct impact on the bottom line. But the property profession, with some notable exceptions, lags behind other disciplines in offering clear and useful analysis. All too often real estate issues are perceived to hinder, or even prevent, the implementation of business strategies. To make a real contribution in the boardroom, modern business tools must be adopted and adapted to deal with property so that it no longer hides behind secrecy and jargon.

Stripping away the layers of industry technical language, the key to understanding property for senior executives in both the public and private sectors comprises five main stages: portfolio analysis; benchmarking; liability planning; targeting; and, implementation

Corporate property portfolios should be analysed to ensure their structure makes a positive contribution to both the business and style of the company.

Put simply, an understanding of use, operating costs and tenure is required for each component part of the portfolio. But in order to determine the nature of the contribution made by the properties to the company’s business, the analyst must go on to ask the following:

What is the relative quality and flexibility in use of each building?

How do the locations interrelate and compare? How does the mix of lease lengths fit with business expectations? Is flexibility of use available where it is needed?

Measures can be introduced to contrast cost with suitability. These will often be shown to bear less of a relationship than preconceptions assume.

Additionally, the role of the company’s balance sheet must be factored in. Strong companies can use this to obtain a relatively low cost of occupation, particularly on their core buildings where longer leases are often best suited. Weaker companies will have to pay more, especially for flexibility, and they should only be encouraged to do so where it is most needed.

Benchmarking enables senior executives to judge where savings ought to be achievable or where other factors may be having an adverse affect on staff efficiency or morale.

Discussion of business objectives and culture will determine the internal benchmarking standards, for example space per capita, which should be applied in each business. Once this has been done, clear targets can be set and achieved. New systems or equipment will often be needed but cost savings over time can be estimated at the outset and compared with the project cost to show effectiveness.

Table 1 shows average space used per person in a portfolio of 10 office buildings, set against the average and with a target occupancy efficiency included. This is a simple and easy to achieve benchmarking study for any company. The first area for further examination are buildings 3, 4 and 6 which appear to be under-utilised in comparison to the others. It may be that these buildings are used for customer reception or other low density uses, in which case differing standards should be applied. They may however be intrinsically inefficient or just badly designed. In either case a project to resolve the problems of each building and increase efficiency is called for.

The second area of concern is the apparent overcrowding in buildings 5 and 9. Premises reviews often show good reasons for this, for example informal “hot-desking” arrangements or misallocation of part-time employees.

However, from a business efficiency perspective, overcrowding can be just as wasteful as underutilisation and needs to be analysed and addressed quickly. Table 2 compares staff turnover, within the same business, at the building level to the portfolio and overlays the occupational densities looking for trends.

Of the above mentioned “low density” buildings (3, 4 and 6), it is building 3, with both low density and high turnover, which clearly merits further research. While this study may not give all the answers, in our examples the “high density” buildings (5 and 9) also show very different levels of above average staff turnover. It is possible that the key to controlling staff loss may in part lie within this analysis, and the savings created by reducing disruption and recruitment will inevitably repay a multiple of the extra accommodation costs incurred.

In this way two simple graphs have identified a set of real projects, all with quick payback potential.

Once internal benchmarking has established itself within an organisation, comparison with external sources, particularly within the same business sector, will provide useful guidance on relative overall efficiency of property use and management. External benchmarking will become more common place as independent property analysts refine the data they obtain from many organisations.

Many reasons are given for not planning property liabilities including:

“The money needed to fund a proper maintenance programme will adversely effect our cashflow.”

“Our major liabilities are, or can be, postponed to at least three or four years hence, outside the scope of current management objectives.”

“An uncertain level of real savings will not occur for some years and meanwhile scarce resources and cashflow are needed elsewhere.”

This “ostrich” mentality can lead to decisions being made in ignorance.

Once in place, a profile of the extraordinary liabilities of an operational property portfolio, over time, provides any finance director with a powerful management tool. At least a proportion of the liabilities can be moved, spread or concentrated and when set against data on the other capital expenditure of a business informed decisions will result.

Advance liability planning, even in the rather dull world of dilapidations, can provide very real savings in the medium term and sometimes even in the short term. The key may well be tax planning.

Once a selection of the properties within the portfolio “most likely to” has been identified they can be examined in more detail and individual cases made to, for instance, refurbish, dispose or expand. Targeting can highlight the real efficiencies which may be achieved, while at the same time, taking into account business needs and precise costings.

The tools used to help with these decisions can be based on straight forward cost comparisons, but are most effective when they also involve the more complex cost/benefit analyses, applying weightings which have been both set and used by other important parts of the business, for example human resources or information technology. It is essential they bear in mind both the objectives of the business and the overall need to minimise liabilities.

Once a case has been “proven” on the most responsive parts of the corporate property portfolio, attention can be turned to the more marginal projects, which can be re-examined in the light of the results already achieved.

It is only through implementation that improvements to the portfolio, productivity increases and cost savings will be made. All too often, magnificent, bound strategy documents collect dust for the want of management trust and available resources.

The six golden rules of project implementation are as follows:

Use the tools to prioritise projects either by cost effectiveness or business need. Remember that internal politics will play a role and need to be satisfied.

Do not try to action too much at once. The work will increase exponentially as soon as one project is started.

Attend to resources at the outset. A good project will absorb the costs of resourcing and retain its viability.

Remember that project co-ordination is time consuming. If an internal manager’s time cannot be effectively freed, consider resourcing externally.

Do not be afraid to outsource. The cost will be pre-agreed against a budget set in relation to benefits to come. Most companies will not wish to carry the necessary spare capacity to handle these projects and the effective use of external resources and skills will add to your reputation as a manager.

Agree realistic budgets and timescales at the start-up meeting. This will enable success to be measured at the end of the project.

Every business is different and so are the benefits that will result from getting to grips with your property issues. What is certain is that allowing property to become “an accident waiting to happen” will catch up with a business sooner or later. Property assets, outgoings and liabilities really can be controlled and made to work to the benefit of a company and its shareholders.

Some benefits of the strategic management of corporate real estate can be demonstrated by the following:

The second graph shows the lease endings, in terms of the square metres of accommodation effected, within two portfolios on a year by year basis.

These units of accommodation can be surrendered at the appropriate time without cost, carried liability or delay.

Series 1 represents a well planned portfolio where the property strategy has created peaks of no-cost opportunity which coincide with the regular, in this instance, points of greatest potential change in this particular company’s overall business plan. Series 2 is the profile of an unplanned portfolio where space flexibility and the business plan bear no relationship.

The strategic management of a static operational portfolio can produce significant direct savings, perhaps as much as 5% of overheads overtime.

For a dynamic portfolio, increased productivity is the measure.

Indirect benefits from strategic management, which are real but not so easily measured can include; an improved image, both to shareholders and clients; increased output as staff feel more comfortable and work more effectively; and the ability to meet and reduce the cost of future challenges to the organisation.

The analysis of property using established business tools brings property, as an asset of business, back into the domain of the boardroom. The implementation of business tools provides a number of benefits, namely clarity of reporting.

The focus of each project is defined and understandable, removing the mystery of property advice; a cost/benefit analysis of the available options is provided; they are quantitative, ie they estimate the savings before a project is started and real success can be judged against pre-set targets; and, they highlight the most responsive areas of the portfolio. Once one or more projects have proven their worth, the process can be widened to look at more borderline cases.

This approach demonstrates that property advisors can prove their worth by estimating costs, savings and delivery upon a pre-agreed time scale.

After all, every other service provider to industry is expected to.

Tim Walker-Arnott is manager of Arthur Andersen’s Real Estate Services Group, and Andrew Waller is an associate at chartered surveyors Matthews & Goodman.

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