Suppliers Key in Mastering Real Estate’s New Realities
AUGUST/SEPTEMBER 1998
At Your Service:
Suppliers Key in Mastering Real Estate’s New Realities
by Jack Lyne
Corporate real estate is morphing again, driven by infrastructure integration and value-based management. Service providers are scrambling, but the leading edge is fundamental in finding solutions, IDRC’s Maryland World Congress underscored.
Packard Bell was in deep real estate trouble, dangling only days away from being out of business.
On Jan. 17, 1994, the Northridge earthquake in northern Los Angeles shattered Packard Bell’s only manufacturing facility. At 4:31 a.m., the top floor collapsed, crushing the plant’s first floor.
Eleven major roads were shut down — and soon Packard Bell would be, too. A local warehouse contained the last four days of production.
Packard Bell bounced back, though, with the kind of flexible real estate strategy that can save the corporate derriere. But Packard Bell didn’t solve the dire emergency alone. It worked in furious tandem with its service provider, LaSalle Partners.
“About an hour after the quake, we were working together on the cell phone, because all the regular phones were down,” recalled Jan Pope, San Francisco-based LaSalle Partners executive vice president.
“One facility nearby would work for Packard Bell’s needs, and we set out to secure it. It was owned by a company in Cleveland. To make a long story short, we secured the facility, and in just three days Packard Bell was in it, with production up and running.”
The Packard Bell/LaSalle Partners’ collaboration is a case study in a major shift in the relationship between corporations and real estate service providers.
As the Northridge quake underscored, leading real estate service providers are no longer merely arms-length suppliers. Increasingly, they’re intimately involved in critical corporate business: providing workplace solutions within an environment in which constant change seems like an ongoing earthquake. Expectations have become something to exceed.
“Service providers must reflect reality back to me even when I don’t want to hear it, and they have to help me be more competitive,” said John Helling, KeyCorp senior vice president of corporate real estate.
In turn, the corporate push for higher value-added support has radically altered the service provider industry.
“Structural change in our industry is here to stay,” said John F. Powers, Insignia/ESG executive managing director. “We’re getting deeper into our clients’ businesses, and we’re finding ways to add value to those businesses more effectively.”
Today’s service imperative is so great, in fact, that it was the theme of the recent Maryland World Congress of the International Development Research Council (IDRC), the world’s preeminent association of corporate real estate executives. Convened in Baltimore May 9-13, the biannual showcase of real estate’s best and brightest underscored another fundamental swing in leading-edge management of real estate assets — one-fourth of the average firm’s total assets.
As IDRC President Bruce Russell (left) told members, “End-users are asking service providers to add more value and increase their strategic role.”
From ‘Transactionalists
To Strategists’
IDRC’s Maryland World Congress underscored a service provider transition that mirrors the evolution among corporate real estate’s leading lights: moving from “transactionalists to strategists,” as IDRC’s groundbreaking Corporate Real Estate 2000? described the unfolding.
Consider, for example, the cultural sea change at Grubb & Ellis.
“We moved from a deal completion mentality to a client service mentality,” explained Steve Scruggs, president of Grubb & Ellis corporate services. “We created a customer service group, the corporate services group, as well as an institutional services group to provide a single point of contact for client management, and to begin building some of those extra services now being requested — in fact demanded — by corporate clients.
“We think it’s working. We’re betting the company it will work.”
But that evolution is unfinished. As Powers noted, service providers in real estate still lag behind sectors like financial services. Narrowly focused, largely cost-based “vendor” and “preferred supplier” relationships still dominate the lower end of the evolutionary food chain.
Alliance relationships, though, up the mutual ante.
“It’s built on the beginnings of trust, starting to share information in a more open way, to solve problems, not just execute, and to work together to lower costs,” explained Bill Agnello, Sun Microsystems vice president of real estate and the workplace. “There’s more focus on quality and process, and the breadth of services starts to widen. But the level of customer dependence increases, and exit strategies start to be a concern.”
With top-tier strategic alliances, Agnello said, relationships are “completely open book, [with] no information that one party won’t share, including cost structure. The service provider has a full seat at the table. . . . Economic expectations get lofty, and customers want even lower costs. Breadth and depth continue to expand, and customer dependence is huge. Exit strategies are very difficult.”
Alliance 2000: Rivals Bond
However, few supplier relationships have attained true strategic alliance status, real estate and service provider executives agreed. But more creative designs are emerging.
In fact, Alliance 2000, a partnership with Ford Motor Land Services to serve Ford Motor Co.’s real estate needs, is based on teamwork between two direct competitors: Cushman & Wakefield and CBC Madison.
“We wanted to minimize [our] service providers, because it’s very difficult to manage
relationships,” explained Sean McCourt, Ford Motor Land vice president of global real estate. “We decided we needed a global, centralized alliance.”
Ford shared its plans in October 1996 with nine different service providers, including current suppliers CB and Cushman. “In our wildest dreams, we didn’t expect to work with both,” McCourt said.
Similarly, when the alliance idea was presented to Cushman’s board of directors, “They looked at me as if I were from Mars,” recalled O.B. (Barney) Upton, Cushman executive managing director of corporate services. “Some of our competitors call it an ‘unholy alliance,’ but we define it as ‘co-opetition.’ It’s competitors coming together for the benefit of the client [and] our own mutual benefit.”
“Other firms came back with partnering proposals, too,” McCourt said. “In the end, the trust we had led us to choose both firms.” That trust in Alliance 2000 is paying off, with “a substantial increase in customer satisfaction in our lease projects,” he added.
Capital, Globalization Up Ante
Higher-quality services and higher payoffs are part of service providers’ leading edge. But so, too, are higher risks, and some firms won’t clear the bar, said Gary Beban, CBC/Madison president.
“I think fewer service providers will be able to handle corporate needs moving forward under the new strategic alliance arrangements,” Beban explained. “You have to make substantial investments to do it. In fact, we went public to get access to low-cost capital so we could add the services needed to be more competitive.”
Part of those substantial investments are funding global networks, filling a major service provider gap.
Lucent Technologies, for example, is “very happy” with many of its service providers, said Anthony Marano, real estate vice president. “But as we extend some of the other services, particularly internationally outside major cities, the breakdown in service is quite significant.”
“A global interface between providers and users is coming. It’s got to, and it will,” said Jeff Chenen, Mobil Business Resources senior vice president of global asset disposition. Insignia/ESG’s Powers, agreed, saying, “Having a global reach is one of our underlying structural issues over the next five years.”
The drive to globally consolidate providers is part of a process of “disintermediation,” which Innovation Resources President Robert Tucker called “one of the driving forces behind today’s service imperative.”
“Disintermediation compresses the value chain,” Tucker said. “It challenges time-based assumptions, reviewing the time from when the customer says, ‘I want,’ until he says, ‘I got.’ It’s not doing away with people or categories. It’s really better, cheaper, faster.”
Value-Based Management
Measuring ”better, cheaper and faster” operations is increasingly a corporate real estate imperative.
Leading-edge corporate real estate operations are meeting that challenge through “Value-Based Management (VBM),” a concept that’s very significant to IDRC and the entire industry. VBM is a major component of Corporate Infrastructure Resource SM Management (CIRSM), the broad-scale convergence of real estate, human resources, information technology and other corporate support units, which became part of IDRC’s mission at the Maryland conference. (See “Newsmaker of the Month” on pg. 622 for new IDRC President Barbara Hampton’s CIR outlook.)
Real estate’s “primary [VBM] goal is to provide a work environment at the right time, place, type and price,” said Ian Cameron, Arthur Anderson director of real estate services.
Creating substantial performance-based roles means thinking in different ways, Cameron emphasized. For example, it’s no longer enough to quantify real estate’s contribution to earnings. Value-based measures like Economic Value Added better focus real estate on capital’s role in decision-making, he stressed. “The big difference now is knowing how the company, not outside sources, creates and allocates capital,” Cameron said.
“Performance measurements and metrics need to be taken to the day-to-day operating level in the organization,” suggested John Mistnick, Lucent Technologies’ director of economic analysis and business processes.
“Value-based measures are not confined to corporate real estate. They extend across the company,” pointed out Keith Perske, planning quality control manager at Sun Microsystems, which has successfully implemented value-based performance management. “Corporate real estate is not just a service model anymore. It’s a value proposition. We contribute to the bottom line and demonstrate it.” (For more details, see “Measuring Workplace Performance in the Information Age” on pg. 686.)
Real estate executives are uniquely positioned to capitalize on the leadership shifts spurred by corporate infrastructure integration, Perske added.
“We’re the integrators who must think across divisions and geographies,” he said. “We’re the only ones thinking in terms of three-year real estate cycles. We think globally. We have a broader perspective and need to play that type of leadership role to be innovators.”
As usual, real estate’s definitively different CIR thrust is reshaping the industry’s service providers.
Said Cameron, “It is a whole new business model for service.” SS
Also contributing to this report: Mark Arend, Richard Kadiz, Karen Murphy, Mike O’Connor, and Tim Venable
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AUGUST/SEPTEMBER 1998
As IDRC President Bruce Russell (left) told members, “End-users are asking service providers to add more value and increase their strategic role.”