Monday, November 29, 2004
Monday, November 22, 2004
Out-tasking – Outsourcing Alternative for Corporate Real Estate
Gill Advisor for Corporate Real Estate Services
Outsourcing is recognized as one of the greatest organizational shifts of the last few decades and is ranked as one of the top business ideas of the last century by Harvard Business Review.
In recent years, the pressures on corporations to cut costs and focus on the core business have been the key drivers of outsourcing as a solution for many non-core functions under the rubric of business process outsourcing: information technology, human resources, marketing, sales, facilities management and real estate.
Outsourcing is not an entirely new concept in commercial real estate. What is new is a shift in the focus of corporate real estate. In the past, property owners have driven the real estate industry. In the future, corporate space users will be the focus of leading real estate service providers.
Traditionally, commercial real estate agencies emerged as an outsourced marketing and disposition capability for property owners and developers. Brokerage agencies were formed to satisfy the needs of property owners to dispose of vacant space more efficiently than setting up an internal marketing and sales infrastructure for each building owner’s properties. As such, the organization and motivation of real estate agencies evolved to satisfy the needs and goals of property owners.
Commercial real estate agencies compete with each other for listings with large property owners and favour the leasing or disposition of owners’ portfolios. The outsourcing of the leasing or sales process to a broker is specific to a vacancy or building and is governed by a listing agreement for each property. Commission-based compensation that pays the property owners’ agents only for achieving the property owners’ goala signed lease or agreement to purchase the propertyis the norm in commercial real estate. For the most part, real estate brokerage is still a property-focused business model based on transactions that are beneficial to the property owners and their agents. Traditional real estate brokers see corporate space users as solutions to property owners’ problems.
In the past few decades, corporate space users have become recognized as the appropriate focus of commercial real estate and some traditional brokers have evolved into exclusive tenant rep agencies. However, such evolutions have typically failed to align properly with the objectives of corporate space users, because most brokers continue to focus on the specific goal of the property ownerthe signing of the lease or purchase agreement. For the corporate space user, the legal commitment to space by the signing of a contract with a property owner does not represent the completion of the real estate process. More often than not, a signed lease or purchase agreement marks just the beginning of the next important stage of a process for the corporation toward its workspace objectives.
Most corporations do not have the experience, internal resources or specialists on staff to achieve their corporate real estate objectives. Many of these corporations are realizing the benefits of out-tasking successive elements of an integrated real estate process. Not only can companies save money and avoid costly errors performing unfamiliar real estate tasks, but their senior executives remain focused on the core business and their customers. In the context of a board-level appreciation of business process outsourcing, it's natural for leading companies to think positively about out-tasking as a solution for real estate management.
Canadian banks were among the first in this country to pick up on trend toward outsourcing corporate real estate, which began in the United States. With large real estate holdings and clearly more profitable core business opportunities in banking, it was a strategic move for the banks to transfer real estate assets and liabilities to pension funds and the management of all their real estate operations to an emerging industry of outsourced real estate service providers. This is a true outsourcing business model that serves well the needs of the banks, utilities, telecoms and the largest multi-national corporations. Although the implications of outsourcing real estate are on a different scale for most small to medium-sized enterprises, the benefits to most companies can be no less important.
For many companies, there is a close relationship between the company and its corporate workspace, so it is often preferable for senior executives to maintain direct control of the real estate process by out-tasking rather than outsourcing. Out-tasking is assigning the work involved in discrete, specialized real estate tasks, rather than responsibility for the corporate real estate portfolio as an enterprise. In addition to real estate brokerage, out-tasks most often include market analysis, site selection, transaction management, lease administration, design, construction management and project management, as well as outfitting, furnishing and equipping workspaces. Selecting out-tasking rather than outsourcing, executives make a conscious decision to retain control over their corporate real estate process. This recognizes that the company, particularly its real estate executive, is ultimately responsible for the company’s assets.
Out-tasking is often a "strategic catalyst" that rationalizes the real estate processes of a corporation. Executives think carefully about overall real estate strategy when making the positive decisions to determine which parts of the real estate process are appropriate for out-tasking to a trusted advisor and which parts of the real estate process are better handled in-house. This mixed mode approachretaining responsibility for strategy and selectively outsourcing components of an overall real estate process following an analysis of needs and capabilitiesensures a proper allocation of resources and talent. Very often, it's a tactical implementation of a strategy that is consistent with overall corporate outsourcing objectives.
To address the needs of corporate space users, real estate professionals must create added value, not just the cost reductions that have driven larger enterprises to outsource real estate. Some corporations form an alliance with a professional services firm that adds value by providing the resources and specialists to do the work involved with specific elements of the real estate process under an out-tasking contract. In such a relationship, the real estate professional is a trusted advisor and unbiased advocate for the client in all the out-tasked phases of the real estate process. Aligned with the goals of the corporate space user, multi-disciplinary corporate real estate professionals form true alliances with their clients to deliver integrated real estate solutions that are based upon the needs of the client, not the greed of a broker. The added value of out-tasking the real estate process is the re-alignment of the cost-benefits of traditional real estate brokerage with the broader objectives of corporate space users and the effective integration of multi-disciplinary real estate professionals working as a team with company executives.
What are the top 10 factors in successful out-tasking?
1. Understanding the corporate goals and objectives
2. Sharing a strategic vision or plan
3. Forming alliances with the right service providers
4. Effectively allocating resources and talent
5. Properly structuring the out-tasking contract
6. Opening communication among alliance partners
7. Gaining support and involvement of senior executives
8. Aligning compensation with client objectives
9. Measuring financial benefits for the client
10. Managing relationships effectively
In the end, corporate real estate is not about property. It's about people.
Saturday, November 06, 2004
Case Study 1: The Contemporary Workplace?
Chapter 1: Setting the Scene
Someone who I know quite well went to work this week. Her interest in this site compelled her to tell me how her organization is addressing contemporary issues such as lifestyle considerations, change brought about by mergers, how physical space is being used given the rapid expansion in personnel, how the company deals with rapid population growth in the city where they operate, and how the company has instituted the principles of business continuity in the workplace.
I thought I would spend this week describing some of the things she told me about and then making a loose evaluation of how well the principles being implemented are in step with the workplace continuity strategies we often discuss in this forum.
As a starting point, it may be a good idea to set the scene. We live in a city with a metropolitan population base exceeding 4.7 million. A city of this size often tests the limits of local infrastructure, including highways, public transit systems, and power usage. Although the company she works for is a traditional publicly-traded US-based financial institution, it is doing its best to try and meet the needs of its workers' obverburdened lifestyles, through initiatives that are supposed to improve productivity and morale.
The nature of the work this woman does is highly analytical and most people within her department spend the entire day in front of a computer screen crunching numbers and performing elaborate calculations of their clients' data - clearly, a knowledge-oriented environment. Despite this, the hours are set at 8:30-5:00 and these hours tend to be strictly enforced. In fact, the brightest and most dedicated have risen through the ranks to management. Today, instead of spending their time doing the thing that made them establish a name for themselves in the first place, they spend much of their time as glorified hall monitors, roaming the corridors making sure everyone is at their desk doing their work.
Chapter 2: Delivering Shareholder Value
There has been a great deal of talk in the U.S. over the last few years about pending changes to Social Security. President Bush's decisive mandate makes immediate reform seem like a forgone conclusion. How this will precisely be done is anybody's guess, but there will certainly be a good deal of privatization and outsourced functions to third parties. It seems as though our subject company in this quasi-case study will stand to benefit from this reform.
The company is publicly traded on the Dow and if it is properly managed and positioned, its stock value will almost surely rise as soon as the President announces reform. This type of background info is important because it becomes the driving force behind the managerial decisions that are made and dictate the course of day to day operations within the company. Under this scenario, there is little room to implement sweeping programs that will drastically alter company culture - analysts don't like that kind of stuff, because it's all about beating the expectations of the street and posting better results than those projected by Wall Street.
In these circumstances, you have to keep it simple and stick to a predictable script. The first component is location. The company has chosen to centralize most of its people in one location. Currently, they occupy about 100,000 square feet, but will probably add another 50-75% over the next 3-5 years. For some, this can be troublesome. There are a number of employees on my friend's team whose total daily commute approaches four hours. That's four with an f. The office is centrally located and office rents run about $25 per square foot (excluding additional rent). Although they may lose close proximity to downtown, suburban space can be rented for anywhere from $10-$15 per foot, and they can substantially reduce the commute for a number of very bright team members, who simply don't have the resources required to buy a nice place closer to the city.
What I am about to state is purely speculative, but might be applicable to a number of organizations so I include it for illustrative purposes. The owner of the building where this company is based, a large institution, whose portfolio consists primarily of downtown office buildings, has another year left until TRIA expires, so the issue of terrorism insurance isn't on the front burner. A year from now, however, things could get a little dicey if the government doesn't find an adequate way to backstop the insurance industry. If they fail to find a solution, it is unclear how landlords will be able to secure insurance, what price they will pay, and how to pass those costs on to their tenants in an economic way when leases roll over. The situation becomes murkier the closer properties are to densely populated areas.
Even if the TRIA issue is resolved or extended, the problems for tenant and insurer don't end there, as insurers will increasingly be looking at the types of risk mitigation programs that are being put in place. Recent events highlight pending changes that should be forthcoming in the insurance industry.
Chapter 3: Management, Insurance and BCP
In almost every respect this is a very forward-looking organization in terms of the work they do and the processes used to complete that work. It comes as suprise then to find that despite their outwardly progressive appearance, this company is often steeped in tradition that at times can prove very difficult to change and one manifestation of this can be seen by the rigid methods used in managing their workforce. In this office - one comprised largely of skilled knowledge workers - managers still demonstrate their reluctance to have any worker on their team out of their direct line of sight. Remember, we're talking about a workforce of university graduates with quantitative backgrounds; despite this, their movements are closely monitored.
There has been a great deal of discussion about easing up on the reins of tradition and adopting flexible work schedules and even implementing a telework program. However, like many great ideas that conceptually make a lot of sense, implementation often falls by the wayside. The effects of these circumstances on HR - commute times, rigid monitoring, other opportunities in the marketplace - have had predictable results. Lately, there has been an unusually high degree of turnover.
Beyond the financial dimensions of this problem, it is exacerbated by the fact that there is no formalized training module that is used by the company for new hires. Instead, they tend to resort to that time honored organizational tradition of osmosis or "trial by fire." The problem lately has been that in the absence of such a module, the responsibility of training increasingly falls on the shoulders of those whose workload is already stretched to its logical limit. It is no wonder that the situation has left many managers shaking their heads and wondering how to stem the flow of new faces, and perhaps gain a little stability.
The issue of procedural communication between peers can become problematic when work needs to be transferred from one employee to another in the event the former is absent or incapacitated. Again, there are no set procedures that have been established that makes this process seamless. These types of issues are in fact at the heart of discussions surrounding business continuity planning and risk management. Regardless of whether or not this organization employs full-time risk managers, it should be pointed out that most small to mediums sized enterprises (SMEs) do not have full time risk managers, therefore, when it comes to issues of risk managment, the organization often has to resort to piecemeal solutions. In this organization, the IT department has created an infrastructure that automatically backs up data, but it doesn't seem to employ measures that extend beyond systems - a more holistic, enterprise-wide approach to business continuity is required. For instance, there is no employee notification system imbedded across the enterprise. Even more significant is that these highly talented workers are all concentrated within a single location.
Reconciling this potential deficiency - i.e. the lack of a systematic approach to business continuity - will have to be addressed sooner or later given pending changes in legislation and the tightening of standards in the insurance industry.
THE "FIX": REASSEMBLING THE PIECES TO CREATE A RESILIENT WORKPLACE
When I first started using this forum to discuss this organization’s issues, it didn’t immediately strike me how the principles we have continually been harping on – i.e. real estate, business continuity, risk, insurance, change management, etc. – all came into play. Over the past week or so, we’ve pieced together a story that integrates all these elements into one tidy case.
Sprawl and Management Style
There are so many things that are happening here, that prioritizing “the fix” is difficult, so let’s just start from the beginning. Clearly, urban sprawl is becoming a more visible concern within large metropolitan super centers. In many cases, the only place where developers can satisfy the seemingly endless demand for new product is further and further away from the urban core, and this can impose substantial lifestyle issues for those workers, especially when they are expected to maintain very tight working hours. For many, particularly those with young children, the challenges associated with life balance can reach their logical ends. Consider for instance that some may have to leave their homes by 6:30 in the morning and not be able to return home until their children are about to go to bed. Bad weather can make this commute even worse.
It seems strange then, that such a culture is allowed to persist especially when technology provides the tools that can create an entirely different workplace that can address most of the concerns brought about by sprawl. We have to question the way this company insists on maintaining tight control over highly skilled knowledge workers. Is this necessary? Perhaps this has to do with the fact that management has not properly defined the way performance is measured, and remains wedded to antiquated evaluation measures such as “time at desk” and charisma. By choosing this course, they fail to capitalize on more precise techniques. The simplest of these is prescribing a defined set of deliverables each employee is supposed to fulfill. In this way, performance measurement moves from the realm of qualitative to quantitative.
By implementing these basic changes, the need for strict employee oversight is minimized if not eliminated all together – something that is not only good for employee morale, but also frees up the best employees from the task of having to play hall monitor all day to putting their skill sets to their highest and best use.
The Public Company Quandary
Going public can often be a mixed blessing. On the positive side there is the opportunity to benefit from new sources of funding that will allow the organization to fulfill its mission in ways that would be unimaginable if they remained self-funded. It also can substantially raise the profile of the organization. There are downsides however, and these must be constructively addressed. For one, the recent spate of financial misconduct among highly visible publicly-traded entities has placed increased pressure on management to enhance their disclosure and reporting methods. One needn’t look any further than the rules associated with Sarbanes-Oxley for confirmation. If managers are under a new set of pressures to continually report, doesn’t it make logical sense to adjust the ways in which employee performance is measured? Again, this highlights the need to adopt more quantitative ways to measure performance.
Another downside associated with the public entity has to do with their limited ability to adopt necessary and sometimes sweeping organizational change for fear of compromising their stock price. Indeed, management must continually keep investors happy in the short term, thus change initiatives such as those suggested in this post are often relegated to the category of “pet project.” Once saddled with this tag, these projects are either put on hold, or implemented over such a drawn-out timeframe that whatever benefits promised by such initiatives are diluted or neutralized altogether. Under these circumstances, they are mothballed indefinitely. Although some of the change initiatives are required to address fundamental vulnerabilities in organizational structure, they are weighed against the short term competitive position of the organization.
Under these circumstances, is it possible for the firm to have its cake and eat it too? Perhaps, but this would require a concerted effort by all stakeholders to carefully communicate the desired effect of these changes over the long term to the investment community. If this is executed properly, they stand a better chance of maintaining their stock value.
Because of their higher visibility, this firm feels as though it is better served by sticking with the status quo, and this mindset filters all the way down to the way they use facilities. The script here is fairly typical: concentrate most of the workforce in one location. As we have stated on many occasions, we question the long-term viability of this policy. The combination of sprawl, rigid attendance monitoring and an increased workload places undue stresses on the workforce and can adversely affect employee morale (especially on those with long commute times). An intermediary solution (i.e. over the span of five years – the general length of a standard lease term for office space) might be to establish a satellite office in a strategically located suburban market and use the savings realized in real estate costs (i.e. the present value of the price difference in rents – say $10 – multiplied by the space required – say 75,000 feet – multiplied by the lease term) to shore up the communication infrastructure that connects both locations (using tools such as webcasting, videoconferencing, or web-based networks).
Over the longer term, however, this organization can further enhance its profile as well as employee morale by looking to next generation workplace strategies, such as implementing a comprehensive teleworking program. As far as real estate is concerned, strategic thinking can benefit both tenant and landlord. The landlord in this case also needs to be aware of fundamental workplace changes that are lurking around the corner. If they choose to take the road less traveled, institutional landlords/investors might in fact be better able to neutralize some of the bite associated with TRIA uncertainty. This might be accomplished by taking the emphasis off of urban properties when putting together its portfolio. Instead, they should start to analyze the ways in which patterns of work are bound to change, and calibrate their portfolio strategy accordingly. A cursory analysis reveals that intermediary investment opportunities including suburban office or even remote teleworking centers may indeed prove to be wise investment targets going forward.
HR and Business Continuity
These issues are clearly making their presence felt within the HR department and must be identified and addressed as soon as possible. Without getting into a painstaking degree of analysis, it can simply be noted that there are a wide range of existing technological tools that can make training, as well as the transfer of work (in the event of the loss or incapacitation of an employee) seamless. Depending on the depth of the chosen solution, it would also be possible for this work to be transferred to a remote location. From this perspective, a fundamental requirement of business continuity planning – i.e. the ability to maintain continuous operations – is satisfied. A comprehensive alternative workplace strategy also fulfills another key directive of business continuity – that is avoiding concentrating all the human capital (i.e. workers) in one location. Fundamental changes like this also make the organization look good in the eyes of insurers who increasingly look to organizations to manage risk in such a way that it’s not just about appointing fire marshals and maintaining lists – measures like this, in fact, will increasingly become the basis for lower insurance premiums, in an increasingly chaotic risk environment.
In the end, the changes suggested in organizational structure include:
- a more dispersed workforce
- strategic cost management through alternative real estate strategies
- lowering turnover and increasing employee morale by creating new management protocols
- creating a more inviting work environment that is better calibrated to the changing lifestyle demands of workers
- instituting fundamental risk mitigation strategies that address contemporary concerns about business continuity
Does this sound like a reasonable approach, or are we off our rocker? To add your comments to this post, and join in an open discussion of this topic, please click here.
Monday, November 01, 2004
Addressing Risk on the Eve of the Election
This piece underscored what a new generation of business continuity planners have been stressing for some time: we live in a time of heightened risk, and it is important that organizations take whatever measures they can to reduce that risk. Because bin Laden has become so closely associated with overt acts of terror that threaten lives and property, we often overlook the specific goal of contemporary terrorism: to attack the financial structure that underlies our economic system. This is a theme we have touched on all too many times on this site, whether it is expanded on in our whitepapers (see the decentralization series on our research page), addressed by suggesting ways in which real estate strategy can be used as a strong risk management tool, or discussed in the many pieces we have written about the vulnerability of the insurance industry. Despite all our postulating, I was taken aback when I saw the headline this evening.
But it also reminded me of the need for all of us to take one step beyond the conventional methods of risk management we often exercise (which sometimes seem to be nothing more than a contemporary application of an air raid siren from the Cold War). We need to be smart, we need to be systematic, and we need to meaningfully identify the vulnerabilities that exist in our organizational structures, and address them immediately. To do this properly, we have to look beyond systems backup, beyond evacuation drills and toward areas including the way we distribute human resources, the way we occupy facilities, plan real estate strategy and maximize our use of technology. Planning of this kind cannot take place in isolation but must be part of a concerted effort. For many organizations, this requires a very large leap of faith, but one that's certainly worth taking.
Business continuity planning simply has to move forward in these uncertain times. All organizations, regardless of size should put the wheels in motion to put a plan into place. If it can't be done internally, there are many who can help. Our company certainly possesses the capacity to lend some insight and evaluate where the vulnerabilities may exist, but if it's not us, there are other consulting firms that do a great job. We've worked too hard creating such a bold economic structure, and it must be preserved. It's just that important.