From Site Selection magazine, January 2000
M A N A G E M E N T     T R E N D S

Leadership Forum Explores CREs'
Role in Fostering Competitive Advantage

b y     M A R K     A R E N D

Jones Lang LaSalle's sixth Real Estate Leadership Roundtable identified several areas where corporate real estate managers can add value by keeping infrastructure resources in line with corporate strategic goals.

Leadership Forum

Four times a year Jones Lang LaSalle (JLL) makes it possible for corporate real estate executives to gather and discuss their industry's most challenging issues and ways in which to meet those challenges head on. Based in Chicago, JLL is a full-service real estate service provider that hosts the Real Estate Leadership Roundtable, the most recent of which was held in Santa Monica, Calif., on Sept. 30, 1999. Attendees typically leave the day-long event with a sense that they are in good company as they face the tasks back in their own shops of sorting out technology options, financial strategies, investor demands and workplace issues. For their part, the JLL hosts both gain insights into the market they serve and provide strategic insights to those seeking them.

"One of the things we're trying to do is facilitate the sharing of best practices on a global basis for [real estate] occupiers," noted Richard M. McBlaine, chief executive of the firm's Global Consulting group. (In October, Jones Lang LaSalle won an International Development Research Council (IDRC) Foundation Best Practice Award for Strategy. Richard McBlaine accepted the award at IDRC's Tennessee World Congress.) "This is an opportunity for us to set a day aside and let the barriers fall between service providers and those responsible from the occupier's side for looking after their companies' portfolios and strategic real estate decisions."

Uncharted Territory
Leaderhship Forum As industry veterans know, the occupier's job is far more challenging today than even a few years ago, thanks to the issues identified in the forum's first discussion, moderated by Eugene F. Page, III, JLL's senior director, global consulting, Los Angeles, and Honor Chapman, chairman of the Global Consulting group, which is based in London. Those issues are technology and the still-evolving role of electronic commerce; shareholder influence and expectation; legislation, deregulation and privatization; increased competition; globalization and increased customer sophistication.

Companies are taking radical steps to stay on the leading edge of their industries in the face of the e-commerce revolution, noted Page, pointing to Web-based services at financial organizations that both compete with existing service delivery channels and help expand the companies' markets. Most e-commerce activity thus far has centered on customer access to products that eliminates traveling to a retailer to purchase the products -- online shopping. But another aspect of e-commerce cannot be ignored, pointed out Frank Robinson, vice president, real estate, at McKesson HBOC, San Francisco. "We are about to see business-to-business e-commerce, and it will be very interesting to see the impact of that on bricks and mortar," he said.

"In the United Kingdom," added JLL's Chapman, "direct selling over the telephone and over the Internet is completely revolutionizing the insurance industry, which has huge implications for space, location and facilities."

Of more immediate concern to many at the leadership forum is competition for infrastructure dollars within their organizations. Many feel the crunch of having to do more with less in the way of capital resources, as technology budgets appear to grow. "In our experience, more is going to technology than to bricks and mortar," related one attendee. "One of our concerns from a benchmarking standpoint internally and externally is that these are dollars were not previously counted in occupancy expenses -- we depreciate that capital -- and now it does. Our occupancy expense by definition is going to ramp up, but our mission in life is to get it down."

Just as important is the impact of operating expenses on total infrastructure costs. "In terms of total operating costs, [the portion] for IT, including monthly communications bills and data support, is now equivalent to what we're paying for rent and operating expenses on the facility side," related another participant. "Our instinct is that that is what will happen in our organization, too," another concurred.

Critical Roles for Technology
Another key technology issue raised involves how corporate real estate managers relate to business unit managers, and there was broad consensus that sharp people skills will always be more important than systems in that arena. Nevertheless, key systems issues need attention.

Below: Debra Moritz, a Jones Land LaSalle managing director, moderated
a session on outsourcing.

Debra Moritz "For the first time, we are seeing technology affect our design process, the way we design the space," related an attendee. "We are now looking at whether the technology we have in place will change in a two-, three- or four-year time frame before the real estate solution has reached its useful life, and whether we are going to have to change the way we're fitting out the space. We are now much more flexible in our design, with an eye on the possibility of the technology changing mid-stream on us."

Flexibility is taking on a whole new meaning in the context of real estate technology, particularly with respect to workplace design. "Flexibility used to mean we would reconfigure a workstation, because we're trying to make our churn costs go down," noted JLL's Doug Sharp, who heads up project management for the firm. "Now, flexibility is at the next level, it's in the underground and overhead grid, wireless [options], raised flooring. It's changed the way a lot of people here do business, because the technology group now has this clout that almost is in competition with the real estate space, and it's a difficult process to manage."

Sharp also sees an important, strategic role for technology. "Corporate real estate will certainly be a people-to-people business for a long time. But the technology advantage we find is that we are getting better information with which to make better decisions. I think that's what all of us want technology to do for us -- provide the information so that we're not making uneducated decisions on the project management side, transaction side or the facility management side. Technology is moving us toward better decision making."

Others in the group advocate more widespread use of technology to help meet corporate real estate challenges more effectively. "Corporate real estate is in the dark ages in terms of technology," noted one real estate executive. Added another, "We certainly see the need for technology, but the technology products designed for real estate suggest it's an immature market; the products available now aren't meeting our needs."

There's plenty of data available for decision support, but tools are needed that can analyze data, filter out irrelevant data and enhance decision support, summarized another participant.

Shareholder Pressure
Just as vexing as the need to sort out technology's place in corporate real estate is the need to reconcile shareholder expectations with workplace realities. McKesson HBOC's Robinson put it best: "A lot of times, Wall Street is driven by EVA [economic value added] or SVA [shareholder value added], and a lot of compensation packages and reward systems in companies today are based on what happens to the value of the stock -- lots of stock options are riding on that. It's extremely difficult to make the arguments that we used to make around why we should own versus lease, when from an economic value added standpoint, return on invested capital, it's difficult to show the return on real estate as an owned situation as opposed to a leased situation."

Martha O'Mara Yet corporate real estate does play a key role in a company's ability to compete and therefore does play a strategic role, if perhaps a less visible role than, say, the marketing department. This is particularly true in the high tech arena, some participants pointed out. "Far more important than [employee] amenities in the high tech environment is the internal mechanism that removes barriers to productivity," asserted one participant. "You have to understand how your internal customer works, how the development teams evolve for different products and how cross-functional aspects come together. The internal work environment should be created in such a way as to remove as many barriers to productivity as you can."

Right: Harvard lecturer Marth O'Mara, Ph.D., stressed the importance of having a strategic mindset in the corporate real estate business.
Added another roundtable participant: "Adaptability is where we help provide a competitive advantage. Our companies are changing and the business units are changing -- some are growing and others are shrinking. The degree to which we can use real estate in such a way that it is adaptable to those changes, it becomes a competitive advantage. Also," he continued, "speed is important. The degree to which we can create or modify the workplace quickly becomes a competitive advantage, particularly for companies where time to market is critical."

And if competitive advantage can be found in retaining employees, which most would say is the case, then corporate real estate can make a difference here, too, particularly in the case of call centers. "The churn rate is critical for us in the call centers, especially if you're involved in a tight labor pool," noted a real estate manager from a major insurance company. "Some of our competitors take the approach of cramming as many people in them as they can, knowing they'll only get eight to 10 months out of the employees, and they'll continue the churn. That's fine if there is depth to your labor pool. But when it's tighter, you cannot afford to lose those employees. We try to make more of an investment into the bricks and mortar, making them less dense with the intention of holding onto these people and keeping the churn rate down. As you go through your five- and 10-year cycle, that makes a tremendous amount of difference. All things being equal, these people will go across the street for fifty cents more an hour."

The rest of the session covered the topic of working effectively with business units, a topic that was explored in even more depth in the following session moderated by Tom Wenkstern, director, Global Consulting, Dallas. For space reasons, this subject will be covered more thoroughly in a Management Strategy article in the near future.

Strategic Mindset Needed
The Roundtable's luncheon speaker was Martha O'Mara, Ph.D., a lecturer at the Harvard Design School and author of the recently published Strategy and Place: Managing Corporate Real Estate and Facilities for Competitive Advantage (The Free Press, 1999). "The predominant mindset in corporate real estate still is 'costs are bad, real estate is bad, we need to get rid of it,' " she pointed out. "I want to propose that the proper mindset for enabling competitive advantage in your organization is the strategic mindset." This mindset, she explained, involves providing a solution to workspace issues that meets your company's unique needs. That solution must factor in people and technology costs a well as real estate costs, which corporate infrastructure resource strategies are designed to help companies do.

Getting management to shift its mindset to one that appreciates real estate as a strategic corporate resource -- the same as research and development, capital, human resources and technology -- is no small feat. The reason, O'Mara suggested, is because there is no way to quantify worker productivity, which is the essential point of corporate real estate. Until such a tool exists, it is important for corporate real estate managers to think strategically, and O'Mara's book offers insights that help readers do just that. The book looks at three primary ways organizations approach making corporate real estate decisions.

Leadership Forum Incrementalism says you only obtain what you need when you need it and try not to invest much money in aesthetics or capital investments. The standardization model applies design and process standards from a central location, specifying what certain types of facilities are to look like. The third strategy is value-based, O'Mara related. "That's when people think about the organization, where it is going, what the culture is and what meaning the real estate decision has for the organization."

O'Mara says her research studied companies to determine why they used the approach they did. O'Mara could determine the answer by ascertaining what strategic issues the company was grappling with at the time it was making a real estate decision.

"Not surprisingly, companies with highly uncertain strategic environments were incremental," she related. "If they were fairly certain, they could standardize. It got very interesting in cases where companies knew they'd be in business tomorrow, but they didn't know what the business would look like, what the customers would demand, where the technology was going or how competitors would respond. But they were at a big enough scale to make larger real estate commitments."

One way to think of such companies is being in a period of strategic uncertainty, O'Mara said. But they are better positioned to make corporate real estate decisions that support the company's strategic plan and foster competitive advantage.

The first of the Roundtable event's two afternoon sessions focused on selecting the appropriate discount rate, the weighted average cost of capital, the cost of debt and opportunity cost, and how these factors should influence corporate real estate decisions. This session was moderated by Robert Dmytryk, senior vice president in Jones Lang LaSalle's investment banking division, Los Angeles, and James M. Hanson, senior vice president, investment banking, Chicago.

Relationships Do Matter
The day's final session, "Innovative Approaches to Outsourcing," was moderated by Debra Moritz, managing director; Graham Coutts, director, development consultancy services in the Australia/Asia region; and Katie Kopec, national director, based in London. Outsourcing arrangements add value if they go beyond mere cost savings to supporting the company's strategic goals.

"Each and every real estate decision that is made actually can and should support the corporate strategy as well as the business unit strategy," Moritz observed. "Anytime we are answering a question, we can see how it directly correlates -- getting our arms around both strategies translates into more effective short- and long-term business decisions."

But outsourcing partnerships are only as successful as the chemistry between client and outsourcing provider. "The synergy between the two companies is the overriding factor," stressed a corporate real estate participant. "Especially if you're outsourcing your own staff, if you're comfortable with that [outsourcing provider] and how it's managed and that your staff will be treated properly, the other issues you can get over. You can always negotiate price and make sure information is kept proprietary. But it starts with a comfort level between the companies and specific individuals."     SS

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