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Place at the Table
It’s still the economy. That cliché of Clinton-era politics remains the starting point for understanding the shifting demands corporations place on their physical assets. The economy sets the stage, shaping the real estate needs of business units. The job of facility and real estate executives is not only to meet those needs, but also to help identify them. The latter step is crucial for facility and real estate executives who hope to win or hold onto a seat at the table when business unit plans are being made and implemented.
To explore what it takes to become an effective adviser to business unit leaders, Building Operating Management convened a group of facility and real estate executives to talk about key management issues. In the wide-ranging discussion that ensued, roundtable participants spoke candidly about the dynamics of building and maintaining a relationship with senior executives in business units. At the top of the list: helping to control costs.
Those cost-cutting efforts have made it standard operating procedure for corporations to charge real estate costs back to business units. These so-called chargebacks have made good real estate advice a valuable item for business units.
“In a broad sense, corporate real estate’s most significant contribution to the bottom line is showing the leaders of the business the consequences of decisions about the two key components of real estate expense: square feet per person and cost per square foot,” said Alan Abrahamson, real estate operations director, AT&T.
“When departments understand that a facility budget is a budget and not a cookie jar, they get religion in a big hurry,” said Lawrence Vanderburgh, senior industry and academic advisor, BOMI Institute.
The evolution of sophisticated chargeback programs has been a boon to facility and real estate executives. “It is very difficult to get the ear of the business unit leader,” said Abrahamson. “But when the business unit bears its real estate costs as part of its cost structure, then those costs become noteworthy. And they’re always glad to have a partner at the table when the subject of real estate costs comes up.”
If facility and real estate executives are to offer timely advice, they must have early access to business unit plans. That means business and real estate planning must be tightly meshed.
“We envision real estate as an ocean liner,” said Philip Meyers, executive director, enterprise infrastructure, Morgan Stanley. “It takes two miles before you can turn. So you have to know strategically where you are going.”
Locking in on Plans
At AT&T, real estate works with senior management of business units to develop rolling 12-month account plans that look at issues like anticipated growth or contraction. Those plans feed regional master plans, which enable the real estate department to integrate plans across business units. Account plans also drive the “budget interlock,” AT&T’s apt name for the process of linking business unit space requirements with dollars and cents.
What gives the process teeth is what AT&T calls the client commitment letter. That document, which must be signed by the business unit head, spells out the terms and conditions of a lease or the details of a major retrofit project in one of the business unit’s facilities.
Like AT&T, Automated Data Processing (ADP) has both a short-term and long-term planning process. In ADP’s case, the long term means five years. That’s an eternity in today’s business environment. But the idea isn’t to determine exactly what the company’s facilities will look like five years down the road. Instead, it’s an attempt to give the real estate and facilities department an early look at where a business unit is headed, so that they can begin to translate business plans into space requirements.
“They never talk about space and they never really talk about the number of people,” said Art Elman, vice president, corporate real estate and facilities, ADP. “They say, ‘This is a growing business,’ or ‘This is a competitor coming up from behind.’” Elman then uses rules of thumb — the number of employees it takes to produce a certain level of revenue for the business unit, for example, or the number of square feet per person — to begin to get a sense of how business expectations will affect real estate needs.
The Five-Quarter Report
The five-year strategic plan — reviewed quarterly with the business unit leaders — feeds into ADP’s five-quarter report, which flags important decisions on the horizon for senior executives. Suppose that a business unit is going to need new space. If it will take six months to build out the space, the business unit must make a decision about the new space six months before the end of the lease on the current space. By going back five quarters from that decision point, Elman keeps important real estate issues front and center with business unit leaders.
“It’s a lot of work, but it has given us entrance into the hearts and heads of our business unit people,” Elman said. “We can give them something back, rather than just asking to be invited to listen.”
In many organizations, the business unit is financially responsible for space once a lease is signed. The idea is to force business units to take a very hard look at their needs before they lease a space.
But there can be a downside to taking a hard-nosed approach to space business units no longer need, said Donald Sposato, director, corporate engineering and technical services, Becton Dickinson. Suppose a business unit signs a 10-year lease for space that it no longer occupies after five years. “That space is going to be on their profit and loss statements for the next five years,” Sposato said. “All of a sudden they’re in the real estate business. You want them to concentrate on their core competencies and real estate can distract them from their primary focus if they’re tied to facilities they abandoned years ago.”
If a space is to be closed permanently, Becton Dickinson takes the asset — whether leased or owned — off the business unit’s books and puts it on the corporate ledger. “I think that offers a cleaner way of looking at the unit’s business contribution,” Sposato said.
Even though a business unit may have to pay for space it no longer occupies, that doesn’t mean it is on its own. “We are aggressive in trying to market unused space,” said Elman of ADP. “It’s a partnership issue. Any unused space is a drag on the company’s earnings and therefore our problem as much as the business unit’s.”
Value of Information
To make the planning process work, it’s crucial to do everything possible to reduce the uncertainties that are inevitably involved. “We have to be able to offer alternatives and solutions, then back them up with industry benchmarking information,” said Robert Collins, vice president and director of management services, Grubb & Ellis Management Services.
Benchmarking with data from the Building Owners and Managers Association (BOMA) International was one element of the effort by the Public Buildings Service (PBS) of the General Services Administration to reduce costs. “In 1996 we started benchmarking operating costs with the BOMA ‘Experience Exchange Report,’” said Paul Lynch, assistant commissioner for business operations. “At that point we were 2 percent above the BOMA benchmarks. Now we are 17 percent below the BOMA benchmarks on a nationwide basis.”
For all the focus on reducing the amount of space used by the corporation, operating costs are also critical. “Most of our clients look at both categories with equal emphasis,” said Daniel Probst, senior vice president, Jones Lang LaSalle.
It isn’t just owner-occupied space where operating costs count. “A savvy potential tenant is going to look at how operating costs affect the overall cost of the lease,” said Collins of Grubb & Ellis.
Lease structure is sometimes an impediment to energy upgrades that can trim operating costs, with the landlord incurring the expense and the tenant getting the savings. “Once you sit down and educate the tenant, there’s usually not a disconnect,” said Richard Greninger, managing director, CarrAmerica. “But it takes effective communication, and you pretty much have to guarantee performance.”
With cost cutting at the top of the corporate agenda, it’s easy to overlook the other big way facilities can contribute to a corporation: productivity.
That’s a much harder sell to top management. “In our company facilities get a lot of recognition,” said Elman of ADP. “I have a direct pipeline to the chairman of the board and president of the company on all decisions related to facilities. But the facility is not looked upon as a productivity tool.”
The question isn’t whether there is a connection between facilities and productivity. “Everybody knows that facilities have an impact on productivity,” said Vanderburgh of BOMI. “But as a practical matter measuring it is so hard you can’t prove it.”
Links to Productivity
Roundtable participants identified several areas where there is a more direct link between facilities and productivity. “Connectivity really does affect productivity,” said Greninger of CarrAmerica.
It’s also easy for corporate executives to see that the reliability of data center facilities has an enormous impact on productivity, said Probst of Jones Lang LaSalle. The proof is the costs involved if a data center goes down because of a facility problem. And given the labor-intensive operations they house, call center facilities are often scrutinized for their effects on productivity.
Churn is another productivity issue for which the facility is a solution. “We’ve had 150 percent churn some years,” said Meyers of Morgan Stanley. “It is critical in our environment that we can make significant changes in existing spaces either overnight or over a weekend.”
To achieve that goal, Morgan Stanley tries to build on a 5-by-5 grid for both ceilings and floors, using raised floors, carpet tile and movable walls. Both interior and perimeter HVAC duct loops are run to permit window space to accommodate either private offices or an open-plan environment. Furniture and fixtures are as standardized as possible, both within and between buildings. The building management system is designed to be flexible enough to handle frequent reconfigurations. Those measures and others like them add to the initial cost of a space, but Meyers said Morgan Stanley expects the total cost of ownership to be lower.
The productivity payback: “We have moved 1,000 people and 5,000 pieces of equipment over a two-day weekend and this includes significant desktop technology, files, personal contents, and some construction and furniture,” said Meyers.
To avoid the problems of trying to tie the facility to productivity, some companies take an indirect route, using occupant satisfaction as a marker for productivity.
But it’s not simply a matter of trying to find ways to increase employee satisfaction. “Do continuously improving service levels lead to higher satisfaction and productivity, or is there a diminishing return?” Probst asked. “There may be only so much you can do to increase satisfaction. But if you have comfort issues or reliability issues, then you start to have a negative impact on productivity.”
“If an IAQ problem develops and productivity goes to pieces, how do you measure that?” Vanderburgh asked. “You don’t even have to measure it.”
Evidence of Impact
Just because it’s difficult to measure the facility impact on productivity doesn’t mean it isn’t real. Consider a corporation that could reduce the amount of space it uses by consolidating offices that are now 30 miles apart. “A company will get right up to the brink of doing that and then hesitate,” Vanderburgh said. “They have to think about how much they can shuffle people around, how much people will tolerate. It’s an indefinable line but it surely exists. It gets back to productivity.”
A similar dynamic seems to be at work with new construction. Any number of items that are now considered standard in new buildings were once viewed as nice to have but not necessary, and many of them have helped make buildings more productive places to work. “We don’t think about it as a productivity enhancement, but if you compared that to what existed 20 years ago, we’ve moved up quite a bit on the productivity scale,” said Abrahamson of AT&T.
An organization that shows no interest in productivity today may have a different outlook in the future. “The interest in productivity rises and falls depending on where an industry is in its economic cycle,” Vanderburgh said. “If it’s hard to find people, they care enormously. If they’ve got people beating down the doors to get a job, cost-cutting is definitely the order of the day and productivity takes a back seat.”
One organization that’s convinced facilities can enhance productivity is the Public Buildings Service. PBS has launched an ambitious effort to find ways to use workspace to boost employee productivity. The initiative is a substantive one, with its own research director, budget and a workplace productivity “laboratory” in Washington, D.C. Dozens of pilot projects have been launched as part of the effort, which has partners like the Canadian government, BOMA and major architectural firms.
“We house over a million employees,” said Lynch of PBS. “If we can influence white collar productivity, we can really make a difference. And we’re pretty convinced we can.”