Real Estate and the Networked Economy: Big Changes in When, Where and How Business Works

“The future has already arrived; it’s just not evenly distributed yet,” Paul Saffo, director of the Institute for the Future, told a record-setting gathering of more than 2,000 at the San Diego World Congress of the International Development Research Council (IDRC), the world’s preeminent association of corporate real estate professionals.

Unquestionably, cyberspace has delivered a future that shatters conventional corporate real estate thinking about when, where and how work is accomplished.
“With cyberspace, there is no distance between two points; you have immediate co-location,” said Saffo. “Fiber optics are the railroads of the future. Corporate locations can be chosen on the basis of factors other than ‘close.’ We now have the technology to reinvent the workplace into work space.”

Systems, Attitudes Stunt Non-Traditional Strategies

Corporate flexibility in positioning facilities and employees, however, is certainly not evenly distributed. That was obvious during IDRC’s San Diego record-setter, which gathered the industry’s leading lights to plumb “the networked economy’s” impact on corporate real estate.

Thought the networked world’s impact is considerable, it’s still only scratched the surface, most observers agree.

Part of the problem lies in corporate informational networks that “are generally primitive, out of date and awkward,” Saffo said. “We do a really terrible job of mixing technology with organizational structures.”

That assessment was echoed by Edwin Lang, global accounts vice president for enterprise systems provider SAP America, which has a dominant 26 percent market share. “There’s a great need for enterprise systems that integrate all the processes on a global basis,” Lang said.
But many in San Diego pointed out another, more low-tech barrier to real estate change: old-line managerial thinking.

For example, the anticipated flood of corporate telecommuting has been but a trickle. Telecommuters make up only 2 to 3 percent of the work force in most large U.S. cities, studies indicate.

On the other hand, corporate leaders have more readily accepted alternative real estate strategies, which offer employee options like hoteling, shared space and “work anywhere/anytime” virtual offices. More than 40 percent of Fortune 500 firms have formal non-traditional office programs, research indicates. But old-line attitudes are herding many of those programs back inside the borders of the status quo.

“I’ve seen a bit of a retreat from the virtual office, most commonly among sales and service workers, with more of an emphasis on common corporate space,” said Tom Davenport, director of the University of Texas/Austin’s Information Management Program.

That pullback lies in part in what Saffo calls “organizational organ rejection.”
“A lot of supervisors don’t like not being able to see the people they’re managing,” Davenport added.

Dealing with such managerial growing pains vis-a-vis cyberspace-offered work-space options is a broadly shared experience, many real estate professionals in San Diego indicated. Said Lucent’s Dick Dyer, for example, “The key is to use space differently, not to drive the virtual office up. The cultural change is too much for middle management.”

Real Estate’s Move from ‘Cost Reduction’ to “Value Creation’

But today’s “retreat from virtuality” doesn’t only spring from “bad reasons” (to use two of Davenport’s descriptions).

The corporate rethinking is also based in a very good reason: “creating value.” That’s what business wants now from its real estate assets, said Staubach Cos.’ Peter Larkin, whose firm coordinated on a recent corporate study spearheaded by Arthur Andersen & Co. A similar study in 1993 found that the focus in corporate real estate was on “cost reduction.”

Today’s value-creation emphasis is spurring many firms to reel in sales and service workers. Now, those functions are being assigned dedicated in-house space in order to ensure access to “the voice of the marketplace,” Davenport said.

Totally virtual workers also aren’t “organizationally socialized,” which dilutes corporate culture, Davenport added.

The Gap in Managing Space and Technology

Real estate lies at the heart of one of the major problems in effectively integrating corporate operations with network technology: the disconnect between space management and information and technology management.

“A lot of money has been spent on information management, but not on information environments,” Davenport explained. Part of that problem lies in a vast discrepancy in cycles: On one hand, real estate cycles, still run at least several years for even the world’s quickest firms. Yet overall business/product cycles at some companies have compressed to as little as three months.

It’s not surprising, then, that many corporate real estate realignments are, by necessity, virtual shots in the dark.

“One of the biggest problems is that companies are diving into the alternative workplace without knowing how it will affect them,” Larkin said.

Echoed Davenport, “We don’t know yet which corporate functions should be together or apart, or which ones such be in private space and which ones should be in cyberspace.”
Existing research reviewed in San Diego provides some real estate guidance — but the advice isn’t always consistent.

A recent MIT study, for example, shows that employees more than 30 feet (9 m.) apart don’t communicate. That would seem to make shared corporate space is imperative for organizational effectiveness. However, the study found that office size is “the second most important productivity factor,” Davenport noted.

Shared Service Models: Can They Fill the Gaps?

Shared service models have sprung up in part to attack many firms’ functional fragmentation in space use.

Shared service models, of course, aren’t new. They were initiated three decades ago to enhance corporate financial management and human resources.

What is new is the direction in which the networked world is nudging shared services. Information technology has made corporate facility connectivity as important as proximity — and, at many companies, more importatnt. That’s made today’s shared services much more of a force in unifying corporate globalization. “Shared services is not just another name for centralization, or just another cost-reduction scheme,” said Ernst & Young’s Richard deMoll. “There’s more and more of a searching for commonality, a bundling of services.”

Shared service models, however, can provide substantial savings.

For example, CIGNA Corp. combined its real estate, information technology and human resources functions into the Workplace 99 shared services initiative. In only 50 months, the program cut $75 million out of the company’s annual real estate expenses, reported real estate vice president Robert Hamilton.

But CIGNA’s model, like other current cutting-edge initiatives, cuts more than real estate costs.

For example, Business Resources Inc. (BRI), U.S. West’s shared service unit, cut occupancy costs by 16 percent. But with new alliances and high-reliability service providers and suppliers, BRI upped customer satisfaction ratings from 89 percent to 99.5 percent.

“We didn’t believe we were in the telephone business,” U.S. West’s Rick McPherson reported. “Other competencies — the property, materials and fleet management functions — were our strengths and represented the actual businesses we were in.”
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