Improving Your Balance

Real estate-related costs represent one of the top three or four expenses on the income statements of over 80% of US businesses.  When times get tough, they are an easy target - a low hanging fruit just begging to be picked.  However, the picking is often done in a ham-handed way - typically through staff reductions, outsourcing, or counterproductive edicts that, at the end of the day, only trigger the Law of Unintended Consequences.

There are two common mistakes that organizations make when trying to improve the efficiency of their real estate operations - both having to do with the degree to which planning and decision making are centralized and controlled.  Over-centralization results in a stultifying "command and control" environment.  Under-centralization results in organizational and financial chaos.

A few years ago a consumer products company had developed a new product they were sure would quickly become a category killer.  They hired a national sales manager to manage the roll-out - and gave him carte blanche authority over the process.  Rather than approaching the roll-out in an incremental way, he floored the pedal and opted for a ballistic launch.  The net result was the procurement of bunch of leased sales offices in most major cities in North America.  Eighteen months later (after the product had fizzled), there were a whole bunch of sales offices that needed to be sublet for the balance of their terms.

(The rule of thumb for subletting is that it will cost you 50% of the obligation remaining on the lease - keep that in mind the next time you become irrationally exuberant over the portents for a new facility that is scaled to accommodate a lot of projected growth.)

The flip side was a company that imposed rigid guidelines on its field managers - essentially neutering them in all things having to do with real estate and forcing almost every decision to be controlled by a central bureaucracy of facility apparatchiks.  The manager of a significant manufacturing line had back orders in a holding pattern that reached past the moon.

But getting the kind of facility relief he needed was an exercise akin to moving a mountain with a teaspoon.  His authority was constrained by an arbitrary dollar amount (the corporate wonks only got involved if this threshold was exceeded) - and the solution he needed was a multiple of that amount.  Being somewhat of a "don't ask for permission - beg for forgiveness" kinda guy, he found a facility that would accommodate his operational needs and then structured a transaction that broke the acquisition into components that each fell within his budgetary limits.  Fortunately, things worked out. His quarterly numbers soared and a few years later he was appointed CEO of the whole organization.

There's also a middle path to enlightenment.  A large global distributor of industrial products wanted to improve the way real estate decisions were taken without upsetting their very effective entrepreneurial culture.  Their legal and accounting department needed more input and oversight (for, among other things compliance purposes) - but they wanted to keep their local and regional managers actively engaged and invested in all real estate decisions.

The solution was to develop a comprehensive database containing all pertinent facility information - a process informed by realistic metrics and regulated by transparency, so that all of the stakeholders had all of the pertinent facts - and the tools required to support the process.  The net result was more order, greater efficiency, significant reductions in opex, and happier managers and shareholders.