More Value Lies Ahead
Adds Barry Varcoe, director of strategic development at Johnson Controls Integrated Facility Management, Waterlooville, U.K., "Personally, the most important thing that came out of the Alliance process was the realization that corporate real estate has only scratched the surface in terms of the value it can bring organizations. If, over the next five or 10 years we as industry can come to grips with this issue of portfolio management, aligning all aspects of property with the organizations that occupy them and use them, then there is a lot more value to be squeezed out of property, whether from a financial point of view or the users' point of view."

Varcoe's role was to examine the portfolio management process as practiced at the corporations involved in the alliance and to gauge their use of asset performance measurements. Besides participating in a key portfolio management exercise, Johnson Controls was keen to gain insights into corporations' use of actual space, in addition to its financial value. "Our suspicion was that there would be reasonable sophistication regarding the financial dimension of portfolio management, but that less work was going on as to the reason those assets were being held in the first place," says Varcoe.

"We went through a typical research methodology," once the group was in place, says Bomba, "and we investigated different portfolio management practices." This phase involved interviews with eight or more executives at the participating corporations; CFOs were involved in some cases, and portfolio managers, analysts and other relevant players filled out the corporate team. Interviewees were asked questions from an extensive, detailed survey designed to yield a thorough understanding of how portfolio management is executed at the participating companies.

"The second step was to analyze those practices and put together a basic model and see where there might be gaps in it. Then we put forth some ideas on how to fill in those gaps and investigated those a bit further. In the end, we came up with what we felt were a set of best practices," says Bomba. Some of those practices are in use at companies that participated in the alliance; others are not yet implemented. "All of the practices have been vetted with this group of corporations in terms of usability and practicality and whether it is something that would be useful to them," he says.

Filling in the gaps was largely the task of the specialist researchers. Besides Varcoe's work in the area of processes and performance measures, other service providers added fresh thinking in several key areas, including information systems for portfolio managers, financial considerations -- such as lease vs. own -- and strategic drivers behind the need to optimize property assets within the framework of the organization's strategic objectives.

A New Look at Supply and Demand
Heading up the research into the latter topic was Martha O'Mara, Ph.D., a lecturer at Harvard's School of Design and a leading industry expert on blending corporate real estate with corporate organizational strategy. "The piece of the research I worked on specifically was [workspace] demand forecasting, which was a logical extension of my work in translating big-picture strategy into numbers and the longer-range plan," says O'Mara. "Most companies have systems that help them deal with the 12-month horizon, but they have a harder time looking 12 to 18 months out."

O'Mara's research produced a four-stage model of demand forecasting, which addresses, among other things, ways to manipulate supply so that forecasts need not be as accurate. "This is largely inspired by what is going on in the business literature, which is also about bringing more flexibility into production -- it's the real estate analogy of flexible manufacturing," she relates. (O'Mara's work in the area of demand forecasting will be the subject of a Management Strategy column in a future issue of Site Selection.)

"By the end of the process," O'Mara recalls, "we were able to articulate a much clearer model of portfolio management, particularly with the upfront recognition that the real estate asset has three completely different personalities. It's a balance sheet financial asset, it's a market asset and it's an organizational asset -- that's an apple, an orange and a banana. There are no common metrics." What the asset is worth on the balance sheet and what it's worth on the external market are completely different, as is its worth to the organization.

Below: Barry Varcoe, director of strategic development at Johnson Controls Integrated Facility Management, predicts enormous value will come from corporate real estate groups that apply meaningful performance measures to corporate strategic objectives.

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"There may be some covariance among those things, but it's usually coincidental," O'Mara observes. And value placed on one aspect, say the balance sheet worth, is often used to measure or value another. Determining which cost of capital to use for real estate assets triggered some of the livelier discussions, she adds. "Is it the corporate cost of borrowing, or the company hurdle rate?" she poses. "Usually not. It's somewhere in between the corporate borrowing rate and the real estate return rate, factoring in opportunity cost -- are you using capital that could be deployed better?" The right answer depends on the company's risk tolerance and, again, strategic objectives.

Ultimately, the alliance exercise confirmed in O'Mara's mind that though real estate portfolio management has been practiced for years in one form or another, only now is it emerging as a key corporate function relative to corporate strategic practices. Secondly, the alliance underscored for O'Mara the importance of good information and an easy-to-manipulate database.