From Site Selection magazine, November 2000
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Demand-Forecasting Solution Is More than Just a Phase b y W I L L I A M L . Y O N T Z
At Capitol One, we have been grappling with just this issue in the corporate real estate (CRE) department for some time, and with good reason. Capital One has been growing of late at a rate of 5,000 employees per year. Headcount stood at 18,000 employees as of August 2000. And it's no wonder why. The company ranks on Fortune Magazine's "Best Places to Work" list, and it recently was named to the Fortune 500 list -- and the company is only six years old.
In the last two years, square footage has more than doubled. Capital One's 5 million sq. ft. (465,000 sq. m.) of space is spread across 53 buildings in 10 cities on two continents. Between now and 2002, it will likely add 3.5 million more sq. ft. (325,000 sq. m.) to accommodate another 10,000 employees.
Today's competitive environment requires that corporate real estate not only house employees, but also provide space that enables the company to recruit and retain the talent to sustain that growth, enhancing its "employer-of-choice" identity. The workplace matches, defines and refines our company culture; it is our culture that attracts and retains associates. The corporate real estate team is guided by a vision of a workplace that is collaborative, growth-oriented, flexible, vibrant and smart. "Any space will do" does not cut it in today's unemployment-rate environment.
Capital One continues to search for -- and test -- new business ventures. The business needs of each of these groups vary, driving real estate and workplace requirements unique to each population. These "wild cards" often make for an exciting demand-forecasting process.
Historically, CRE was in a reactive mode, operating under a "just-in-time" delivery method in an effort to keep up with the rapid growth. As a portfolio strategy was developed to establish parameters on which all real estate decisions would be measured, CRE caught up with the growth.
The portfolio strategy evaluates occupancy needs in terms of "core" and "non-core" needs based upon the risks associated with their use. Core occupancy needs are characterized by a low degree of labor risk and business risk. In addition, the strategy recommends real estate solutions for general office users, or "staff", and call center/operations space that are distinct to the needs of each group, as well as special-use building types, such as a data center or an amenities facility.
Staff groups have a significant need for collaboration and easy interaction to facilitate information sharing and rapid response to the development and launch of new business ideas. For operations groups, access to labor and leveraging managerial talent between groups are important to enhanced performance. These varied business needs, in conjunction with growth that has often strained seat capacity, have been a significant challenge for the corporate real estate team.
To help alleviate the frustrations of forecasting, Capital One created an Integrated Capacity Plan (ICP) that captures headcount growth by business unit and geography over a three-year horizon. The varied constraints and requirements of finance, human resources, real estate and IT infrastructure require an integrated approach to matching up forecasted demand with planned supply of space.
Historically, our ICP was generated from a "bottom-up" approach to forecasting, relying on information from the business units for growth projection. However, as the company sought to diversify itself, we found that by solely relying on a bottom-up strategy, we would be simply planning for a larger version of the existing company. Bottom-up does not take into account the potential reorganizations, new business ventures or other strategic initiatives recognized in a "top-down" approach. Such initiatives are common in a dynamic, young company like Capital One.
The bottom-up style also lacks a comprehensive global understanding of the varied hiring pipelines in multiple geographies. Further, because there are so many segments using a given set of planning assumptions, they can be compounded and cause over-steering. Given these weaknesses, we shifted to a forecasting approach that is a combination of bottom-up and top-down. This combination approach is key in a hyper-growth company that is growing existing businesses while expanding into others.
While the ICP, which is updated quarterly, is effective, it does not come with a 100 percent guarantee. Recognizing that the ICP figures and growth projections will change with each update, Capital One needs a real estate solution that provides flexibility to meet the varied needs of staff and operations groups and the expected volatility in demand.
Extensive evaluation revealed that we must move away from the "just-in-time" real estate delivery method of the past in order to attain greater efficiency, productivity and flexibility. Our solution recognizes the need to capitalize on economies of scale and mitigate redundancy. In order to accommodate growth, as well as business and associate needs, it is important to recognize that a balance between consolidation and continued use of the existing portfolio is necessary.
Because Capital One's population is comprised of two distinct groups -- staff and operations -- with differing real estate needs, the first step in a comprehensive real estate solution is defining the occupancy for these groups. The corporate real estate group's occupancy plan outlines a real estate option that meets five key objectives:
Based on these factors, CRE selected a phased consolidation approach that groups staff functions into campus locations and leverages existing long-term leases and owned buildings for consolidation of operations and call center functions. Our consolidation approach allows flexibility to accommodate a variety of growth scenarios in a collaborative environment. In addition, associates will have easier access to one another for meeting and collaborative efforts. By eliminating the multi-building dispersion of the associate population and the time each week that associates must invest to overcome this obstacle, associates can redirect this lost time to more productive business activities.
The critical element in making this an attractive strategy is phasing. Phasing offers the optimal financial solution, as it helps to mitigate the overall effective rent differential over time, and allows for less lease overhang. Also, if real estate market conditions afford Capital One favorable lease rates, additional lease space could be added to the portfolio to accommodate growth. Although market conditions may or may not turn favorable for leases, the knowledge of Capital One's "land banking" at a campus by the local property owners would offer Capital One leverage for future lease transactions.
Phasing also facilitates flexibility, because a phased campus approach allows us to secure land bank acreage for future growth. This ensures future space that can be customized to meet our needs. Land banking also allows us to parcel off that land if growth projections are reduced or market conditions change. By developing less space and holding in reserve additional capacity for development, CRE has created the flexibility to respond to growth fluctuations by adding buildings, leasing in the real estate market, or even selling that land, if necessary.
Admittedly, phasing has a downside: the collaboration value is sacrificed for a period of time. Phasing, therefore, becomes an exercise in balancing cost control and collaboration efforts.
The key to a successful phasing strategy is the migration plan. While the ICP provides a three-year forecast, a 10-year migration plan was developed that assumes a geographical population ceiling. It takes into consideration the following: market conditions for existing leases, timing of space delivery with planned growth and occupancy plans and co-location of knowledge workers, regardless of changes in the demand forecast. This plan allows a consolidation of call center workers into an operations campus and the consolidation of knowledge workers into a staff campus, each with the flexibility to respond to anticipated or unanticipated growth.
A phased consolidation approach best meets Capital One's needs, satisfying business requirements while maintaining employer-of-choice standards. This approach capitalizes on the science underlying the ICP process, but allows the ability to compensate for forecasting's inherent weaknesses. While we won't give up our search for the magic tea leaves or crystal ball, we think we've got the next best thing at Capital One.
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How much space will the company need next year? It's the corporate real estate executive's million-dollar question, and the answer is about as easy to predict as the number of times your phone will ring in the next 12 months. The science -- or art -- of demand forecasting relies on how well we can predict the unpredictable. So how does one plan for future space needs? A crystal ball would help, of course, as would foolproof forecasting models. But even sophisticated tools cannot account for every variable.
