From Site Selection magazine, May 2003
QUESTION & INSIGHT
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From Site Selection magazine, May 2003
QUESTION & INSIGHT
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The Consolidation Opportunity
s much as any multinational corporation, United Technologies Corp. (UTC) embraces both new and traditional industrial economies. The Hartford, Conn.-based company's range of subsidiaries extends from the legendary Otis Elevator to its International Fuel Cells division, as well as including Pratt & Whitney, Carrier and Hamilton Sundstrand. All of these operations add up to 100 million sq. ft. (9.3 million sq. m.) of real estate in 5,000 locations. At United Technologies Realty (UTR), President Ron Zappile shuns the traditional altogether in his approach to corporate real estate management (CREM). For decades, manufacturing operations of large corporations have been ma naged by individual unit, with their real estate functions divvied up in the same manner. Zappile has zapped that notion, with a call to go from decentralized and in-sourced CREM to centralization and outsourcing. As he put it in a recent panel discussion sponsored by UTR's first outsourcing partner, United Systems Integrators (USI), he doesn't want the business units making real estate decisions. 
"They really have a portfolio perspective, whereas the business units generally have a segment of that perspective," says another one of Zappile's outsourcing colleagues, Craig Morris, president of the Corporate Services Group at Grubb & Ellis. "Ron and his team have done a great job of coming in, looking at the entire [portfolio] domestically and internationally, and seeing where those savings could be." Before becoming director of global real estate in 2001, Zappile oversaw projects like the 1999 consolidation of five separate offices in Singapore into one regional headquarters. That move has not only provided a stronger corporate presence in the Asian capital, but also will save the company around US$3 million through the lease period. In general, says Zappile, any consolidation realizes a 20-percent savings. Such maneuvering is one reason why the division's "Project Landlord," aiming for $50 million in savings in three years, achieved that goal about one year early. Now under way is Project Intrinsic Value, which has involved a site selection process all its own: 102 locations from UTC's portfolio, all being scrutinized for hidden value. The project includes 36 Carrier locations, 22 from Otis, 19 from Pratt & Whitney, nine from Hamilton-Sundstrand, six from UTC's fuel cell division and 10 from UTC. It's a crucial exercise for a company that can grow at the same time it's consolidating. The company spends about $2.5 billion a year on R&D. During 2002, UTC had acquisition spending of $424 million – "that's a bit below 2001 but we simply didn't find enough deals we liked," says CFO Steve Page. But those deals involve 4.16 million sq. ft. (386,464 sq. m.) of space, which gives Zappile, IAMC member Charles Veley and their global team plenty of opportunities to glean ever more value. And Zappile loves the sound of the word "opportunity." From UTC headquarters in Farmington, Conn. Zappile shared his thoughts on the uniquely proficient blend of internal processes and external expertise that have made UTC and UT Realty so successful. Site Selection: In recent comments on how well the company had navigated tough economic times, your CFO Steve Page gave credit to both diversity of businesses and geographic balance. How does UTR help UTC executives maintain that strategic geographic balance?
Ron Zappile: There are two ways we help weather those economic times. One is that by reviewing and providing opportunities for consolidation or reviewing the portfolio, we may be able to suggest cost savings opportunities that individually, the divisions may not have the awareness of. The second way is that as the divisions are reacting to competitive environments and geographical changes, we then become a support service in a more reactive role, to help dispose of property, sublease it and react to those changes in competitive environment and changes in geographic locations. Perhaps there was a need for a manufacturing facility in Southeast Asia and there is not now a need for that facility, but there is a growing need for a facility in north Asia.
SS: What prompted you to change things to a global perspective instead of a business unit perspective?
Zappile: Going back probably 25 years or more, there was more of a focus on decentralized growth for the organization. About five years ago there was a view to certain areas - for instance where supply management might be able to add a governance perspective from a central location. Can we identify areas such as real estate or some other activity for a more centralized focus on governance of strategy? Not necessarily delivery, because, given the portfolio that we have and how geographically dispersed it is, it would be very difficult to manage all of that out of Connecticut. But to look at the assets, because real estate is an asset on the balance sheet – it's not like travel, which mainly shows up on the P&L.
When you're not effectively utilizing those balance sheet times, the idea was to look at that portfolio and see if we could monetize it. We have areas where the facilities were no longer required, but we were carrying operating costs that impacted the competitiveness of a certain division. Did we have excess space where perhaps we were storing paper files, when in fact it would have been more productive to sublease that space to somebody else? Did we have facilities that we could return and get a different organization in there, not necessarily a UTC organization, but another corporate in there that could help the community and revitalize that area? Those were the kinds of things we had to look at, where we noticed there was a value, and this asset was under-performing. When you have as many facilities and as much real estate as we have, there are opportunities that present themselves all across the globe.
SS: Was it concurrent with this process that you were also beginning to outsource more of those functions?
Zappile: Around the same time we did the first outsourcing, which was North America-based, there was a view within the corporation to determine what were the core competencies of the corporation, and where did they want to strategically apply their resources and assets. Real estate was determined not to be a core competency of UTC. It was important, of course, to provide the right buildings at the right places at the right times to support the business, but it wasn't like manufacturing or engineering, or a critical component or intellectual property. The idea was: How could we leverage the resources that were available outside, such as the service providers, whose only business is real estate and supplying those services? Basically, we wanted to look and see if we could extend our enterprise beyond the borders of UTC into a service provider network whose business it was. [The service providers] were applying resources to it, investing in capital, investing in people.
SS: You recently spoke about changing the discussion at UTC from cost reduction and savings to value creation. Describe how important the change in language can be to a change in attitude, strategy and execution on the part of your team.
Zappile: It may be a natural progression. When you're starting an initiative, one of the major things you're asked is "How much is this going to save me?" By simply providing an awareness and overview, and putting in place standard work and standard processes, where you're not stick-handling every transaction and people know what is expected of them, you can then show successes in that process. [Those successes] ultimately drive the overall cost of real estate down, which is what we wanted to do.
Once you have established the successes and you've shown there is measurable savings that can come out of it, you then indicate that there's a value in having a process that is standardized. And there's value in simply having data. You're not necessarily, every time, trying to convince people that you're adding "value" or "savings" to a transaction. They understand that simply having the availability of the data is worth something. I don't know how you quantify that. That's been of course one of the problems, when people say, "Well, how much is that data worth?" I don't know. If you cost-avoid renting 50,000 sq. ft. [4,645 sq. m.] when you have 50,000 sq. ft. already available in your portfolio, put a value on that. Maybe it's 10 bucks a sq. ft. – that's half a million dollars a year. And simply by having that data, you have the ability to add value. So I think it's a progression over time. There is still some "marketing" to be done on that terminology. But little by little, you begin to get the levers across the globe, who then become your marketing agents and your salesmen and say basically "These guys do a good job, give it a shot." You have to prove yourself every day. It's not sufficient to say, "Here's what I did last year," it's "That's all well and good, but what are you going to do for me today and how can you help me tomorrow?"
SS: What metrics did you use in evaluating service providers in the head-to-head contests for the EMEARS and Asia Pacific contracts?
Zappile: There were a number of things we were looking at, many of which were qualitative, some quantitative. With the depth and breadth of our portfolio, one of the things that was very important was service coverage. What we wanted to do was match either directly owned offices or directly associated affiliates with the service provider, and how those offices overlapped with our business unit locations across Europe, the Middle East, Africa, Asia, wherever we were looking to outsource this program.
The other thing that was important was whether the outsourced provider had similar experience with other multinational companies, with a portfolio that perhaps wasn't as extensive as ours, but had multiple locations in multiple cities, and how they handed those requirements. One of the other things we looked at of course was chemistry – how well did we feel we could work together? And what was the approach that the service provider had in response to the RFP? Did one take it more seriously than others? Did we get a canned presentation? Did we get one that was focused on our requirements? Did they understand our requirements and our issues? One of the things from a qualitative standpoint we looked at was, regardless of anything else, who could provide us the best service? That was a very important aspect. Of course we had to modify that with what resources we may have had available, and how those resources may have worked with the resources the service provider was going to provide. But if we had our druthers and no restrictions, who could provide us the best service in a given location or across a given region? The other thing we were very interested in was who would be assigned to our account, either on a permanent or allocated basis. What expertise did they have? What experience did they have? All of those came together when we evaluated those criteria. We did a scoring system, weighted it, then ultimately had the service providers come in. Those that made the short list were invited back to give us presentations, and from there we made some final selections.
SS: Your audit or "data cleansing" of the UTC portfolio found 7 million sq. ft. [650,300 sq. m.] previously unaccounted for. When you discovered that property, how did you go about addressing the challenges it presented?
Zappile: We basically look at all of the data cleansing as additional opportunities. Because they existed in the portfolio to begin with, when we didn't have the information on them. Most of them were owned facilities, which had been gotten by acquisitions, and just hadn't, for various reasons, made it into the portfolio. We looked at them as opportunities, because then we can match additional owned properties, which may have square footage available, with our lease requirements. Maybe those provide us the opportunity to get out of leased space we would not have gotten out of.
To one degree you could consider it to be a real challenge to bring it in, and how do you explain that you don't have 10 percent or more of your portfolio accounted for? It was always accounted for, it just wasn't in a centralized place under which some governance could be put to it and viewed as an opportunity. The divisions clearly knew it was there, because they managed it, they had people there, etc. We didn't have the information in our database, so that we could look at it as opportunities for the future to consolidate, co-locate and use for purposes other than what the divisions may have intended originally.
SS: Describe the "site selection" process for Project Intrinsic Value.
Zappile: There were a couple of things I thought were not being addressed. Project Intrinsic Value is now addressing just North America at this point. We have not extended any pilots yet internationally, but we're planning that. We wanted to look at the portfolio properties that had value that was hidden – which meant perhaps they were owned properties with low net book value, but were in markets that had experienced increases in value and perhaps there was a gain to be gotten.
It had to be balanced though, because if you sell off your own facilities, where you're incurring only depreciation and a few other items, you then transfer that cost to SG&A [Selling, General, & Administrative Expense], and you have a whole bunch of other ratios that people look at that can impact it. We also looked where we had a high concentration, say in the greater Hartford area. We needed to know, No. 1, what was the capacity utilization of those facilities? You could go and ask a manufacturing guy, "Tell me your manufacturing capacity," and he'll tell you it's 60 percent on shift one and if he's got two shifts going. But no one could tell us what our seating capacity was, or what portion of that seating capacity was being used. We needed that information. The other information we wanted to verify was whether we had the facilities themselves and their details correct. Did we know the ceiling heights, for example, did we know the square footage, did we know how much was usable vs. rentable? All those kinds of activities. One other thing we needed to know was did we have leases that were higher than market and we should go in and try to renegotiate those, or did we have below-market rates where we should go in and extend those, and solidify those for the long term? That was the idea – to look at 100 or so of the largest properties that made up a significant amount of the portfolio, within high-visibility MSAs, and then send teams out to verify that data, collect it, get the contact information, and so forth. So it is a multi-pronged attack on the integrity of the database. We wanted to make sure we had the right data, because as you look at co-locations and consolidations and opportunities, if you don't have the right data, you don't make the right decisions. You need to have the right data at the right time in order to drive the right decision.
SS: Can you give me a specific example of uncovered value, or perhaps a trend in hidden value you've spotted as you go from site to site?
Zappile: One example affected one of our divisions, where in the process of verifying the data for that particular location, there was consideration being given to restructuring that organization or perhaps moving it to a different place. By going out and verifying the space that was available and the facility itself, we were able to make a decision so that when the company announced the reorganization and one specific operation was moving, we immediately were able to refill that facility with a unit from the same division which was looking for a different space in a different area. Therefore it returned that facility immediately to the community, kept the tax rolls going, kept jobs in the area, etc. And all we were doing was verifying some measurements and some space.
In another MSA, we went in and looked at various locations in an office environment, and we've identified several actions where we can consolidate lease space into our own facilities, and relinquish a significant amount of leased space. So both of those examples came out, and we weren't even 70-percent complete with the analysis or the data collection, never mind analyzing the new data we already had. There is a payoff immediately in lower capital requirements, lower rental costs, and so forth.
SS: Of your 115 North American properties under review in Project Intrinsic Value, 74 of them fall under the "waiting direction" category. What processes do you follow to eliminate bottlenecks at this decision-making stage and pursue action?
Zappile: As part of our process, way up front, even two years ago when I was first reorganizing this group, one of the standards in the process is a group of what we call executive sponsors. Among those executive sponsors are high-level executives who have influence within their particular divisions. Part of their job is to help remove obstacles and help the organization understand what we're trying to accomplish and why it is necessary.
When we identify opportunities within our process, we look out a full year in advance as leases are coming up for renewal or expiration, and we go to the divisions to try to get some direction as to what their strategic planning is for that particular location. As part of that process, we identify other UTC locations within the given area that may or may not have sufficient room for consolidation. That was why we wanted to do Project Intrinsic Value, to help identify those. Naturally, when you go ask a location if they have room, nine times out of 10 the answer's probably going to be "No, we're completely full, leave us alone." But if you have the right data, you have some factual information that says, "Our evaluation was that you're 60-percent full. Let's assume you're even 75-percent full. There's a 25-percent opportunity, and if that square footage happens to match the square footage of the location that's expiring, we may consider putting you guys together." That's where the executive sponsor comes in, because he gets that information. At those levels, those operational people can talk to each other much better than having a real estate person come in and, strictly looking at their operation, trying to tell them where their operation should be located, and how they should be doing their processes internally. I can't do that – I don't have that credibility, if you will. But those executives within their division have that credibility. And they also have the authority to help make those decisions, and help force those decisions through the organization. So all of that helps in driving the process. In a lot of those cases, when we have a "waiting direction," in some we have pinpointed five or 10 that we really think they should look at, the others are minor and perhaps they'll come up a year from now for review again. I'm concerned that the number is high, but I'm not concerned that it's out of whack. It just takes time to run them through the organization. And again, the organization has to balance their resources, their capital appropriations, available to make these moves, and sometimes that's a long process in a company as large as UTC.
SS: You spoke of finding good corporate tenants. The amount of property you sublease virtually doubled from 2000 to 2002. What kinds of businesses are subleasing it, and what kind do you look for to fill that space?
Zappile: Of course we look for credit-worthy tenants, that goes without saying. The issue is that we're liable for that space anyway. We like to get people not doing anything illegal or immoral, all the good corporate things. Perhaps they could fit into a facility where we have to do little demising operations, where they fit very nicely. Probably a high percentage of our warehouse locations have a higher percentage of office space than you would normally find, so sometimes it's difficult to find an exact match. But all of those are things that we look for.
SS: One of your building blocks to be implemented in 2003 is a global portfolio management system. Is that the Sequentra system [from United Systems Integrators], or are you working at integrating separate systems?
Zappile: Our new global database system is a marriage of Sequentra and Accruent, formerly Strategen. That is the solution we're putting in place. We're taking all of our data in North America, currently on a Strategen version, and migrating that to a new system. We are also having our service providers – Grubb & Ellis/Knight Frank and Jones Lang LaSalle/USI outside North America in the Asia Pacific and Latin America – load data, as it's being collected off these documents and translated, into that single system. Sequentra is the project management arm, and Accruent is the elemental data. I just call it our strategic solution to global portfolio management, the new global database. It's Web-accessible, it can be accessed around the world. Of course there are security levels attached to it, and not everybody will have the same admin rights.
But what we're trying to do is give people access to their information. This information doesn't belong to United Technologies Realty, it's UTC's information, it's the divisions' information, and they have a right to see it. It also helps me keep the integrity of the data, because they're going to look through it and say, "Wait a minute, that's not right," or "This changed," or "We added some people here" or those kinds of things. We wouldn't necessarily have our fingers into every single location – it's just almost impossible. So I'm enlisting their help, which in turn helps them.
SS: Do you ever do sale-leasebacks of facilities you own?
Zappile: During my tenure here, in the last two years, we've done no sale-leaseback in any transaction I've been involved with.
SS: Of the 4.16 million sq. ft. [386,464 sq. m.] you added last year, did you measure cost abatements achieved through government tax incentives such as property tax abatements, machinery and equipment tax breaks, and so forth?
Zappile: First, on the machinery and equipment, that's personal property taxes, and that's not part of my responsibility here. That's mainly handled on an individual business unit basis by some of the facilities people. From the other side, as far as tax evaluations, we get involved form the standpoint of assisting our UTC tax people in evaluating opportunities, providing them locations that are owned, looking at those locations to see if there's an opportunity to reduce. Or understanding the evaluations first off, and making sure we're paying an equitable share of those property taxes.
SS: With the number of facilities you have in Connecticut, give me your impressions of the business climate for corporate real estate in the state.
Zappile: That's an interesting question. I can speak from the perspective of our operations, in that we're constantly looking at both our owned and leased facilities to optimize them --where they're located, where the people are, how we can get people back onto campuses where we have an owned facility. The climate here from a manufacturing standpoint I think is very limited. From a warehousing standpoint, there are millions of square feet that have been shed by UTC and other corporations, some of which has been absorbed and others are still out there. I think that is also going to take a while to dissipate and be absorbed into commercial use.
 We're optimistic from a UT Realty standpoint – we now have data we can work with and review opportunities that help UTC. But on the other side of that, when we identify areas for disposition, whether by sale or sublease, we really have to work hard to maximize the gains associated with that ... or not even the gains, but minimizing the losses when we dispose of those properties. It's a very challenging environment, which is nothing new, and not just my perspective. But you just have to work at it every day. I wish I could tell you it was more glamorous than it is. It's a daily application of processes, standards, work and trying to maximize resources, and maximize the use of potential assets for UTC. That's what I view my job as. 
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