April 30, 2013
New survey reveals risks of cutting costs in corporate real estate
A new report from Jones Lang LaSalle claims to highlight how those firms who see their property as a driver of added value rather than a cost reap rewards in the form of higher revenue, employee performance and shareholder returns. In contrast, those firms who view their facilities as a cost and seek to reduce those costs for short term gain are, in fact, storing up long term problems and risks. JLL’s report – Global Corporate Real Estate Trends – claims to reveal the top five corporate real estate risks, including negative impacts on competitive advantage and profitability from cost cutting, procurement processes, lack of collaboration between functions and failure to drive productivity.
The 2013 survey, which measures responses from more than 630 corporate real estate executives in 39 countries, points to the pressure corporate real estate decision-makers are under as 68 percent of respondents recognise increasing demand from senior business leaders to enhance the productivity of real estate. The report addresses the outcomes of these increased pressures and details the top five risks and rewards corporate real estate users are facing in 2013:
Risk One: Singular focus on real estate cost cutting undermines potential rewards from revenue-enhancing investments
Investments in long-term real estate and workplace strategies are many times rewarded with significant contributions to productivity and corporate performance; however, the increasing pressures on real estate teams to implement short-term cost cutting continues to undercut more strategic moves. Real estate can continue to add productivity value when cost-cutting measures have run their course — but that typically requires investment, and the resulting corporate resistance to capital expenditure is a difficult barrier to hurdle. JLL’s survey reveals that 48 percent of corporate executives view financial constraints as their greatest limitation to adding more strategic value to their businesses, while 34 percent also cite lack of effective data and analytics. Many lack the tools and training to effectively identify, shape and execute the broader business strategies that would ultimately deliver the most business impact. Corporations need to recalibrate their real estate functions away from tactical cuts and into strategic investments.
Risk Two: Procurement drives price- rather than value-driven outsourcing partnerships
Corporate real estate outsourcing is developing rapidly, and its reward can be significant contributions to real estate productivity, innovation and efficiency. In fact, 92 percent of companies surveyed in JLL’s report are practicing some form of real estate outsourcing. With this rise comes increased participation from the procurement function in the choice of outsourced service providers, with 68 percent citing active involvement. Yet, 58 percent report that procurement, when involved, has a limited knowledge of real estate and its complexity and could overlook these characteristics in a price-driven procurement process.
Risk Three: Workplace productivity is frequently miscalculated in cost-per-square-foot terms, when contribution to business performance better characterises returns
Many corporate real estate footprints are shrinking. However, achieving greater density is not the same as achieving productivity, which 96 percent of respondents are charged with doing. According to JLL’s report, this unwieldy corporate expectation is prevalent as 72 percent of companies now expect real estate to drive workplace productivity. Additionally, 61 percent look for people productivity, 57 percent demand business productivity and 47 percent cite asset performance as a key value driver for the company.
Corporate real estate is more about people than property, and workplace strategy should be centred on how to use property to make employees more productive. The good news is that 67 percent maintain that they’re making strides as the quality of their workplace has improved during the last three years, demonstrating a focus on quality over pure space utilisation metrics. At the same time, this quality has been achieved alongside efficiency, with 68 percent suggesting that the utilisation of space has also improved. Metrics that will help to mitigate this risk include calculating new workplace environments and the achievement of business goals, sales increases that follow real estate strategy execution or other performance metrics that directly or indirectly link environmental improvements, relocations or capital investments to business outcomes.
Risk Four: Collaboration with HR, IT and finance is a must for enhancing workplaces, yet silos continue to constrain joint efforts
Achieving the reward of true workplace transformation requires collaboration, changing management styles and true cross-functional alignment. Formal collaborative organisational structures, such as administration or shared service centers, are likely to increase as workplace productivity increases in importance as a strategic focus. This change presents an opportunity for corporate real estate teams to play a leadership role with partners in HR, IT and finance, and that collaboration trend is forecasted to shift corporate real estate into an integrated shared service in the next three years. While only eight percent of respondents indicated that their function is currently contained within a cross-functional group, 51 percent identify with the model of shared services integration with finance. The reward for such leadership can be improved worker, workplace and real estate portfolio productivity.
Risk Five: Compromising real estate quality to enter high-growth global markets is dangerous
Portfolio growth is predicted to be strongest in the world’s emerging real estate markets that also tend to operate fundamentally differently than mature markets well-known to the executive suite. Many of the emerging markets with the highest growth potential operate with less transparency compared to mature markets, so the process of securing space requires a culturally sensitive approach and local empowerment in order to seize opportunities that best support business growth. Nearly one in five respondents recognises that the greatest challenge facing corporate real estate executives is the risk of not being able to support business expansion in high-growth, low-transparency markets. The possibility of missed expectations is high and failure to deliver can damage the company’s reputation and standing of its real estate team.