Managing through the Downturn: A Corporate Real Estate Perspective

Companies everywhere have increased their efforts to reduce costs and better position themselves to weather the current downturn. Whether it’s due to tighter credit markets, reduced operating cash flows, or other industry specific challenges, companies are aggressively reducing costs.
An opportunity exists for Corporate Real Estate (CRE) to play an important role in a company’s response to the downturn, and in this article we’ll discuss:

• Corporate responses to cost reduction needs and CRE’s role in this process
• Indicators for the need to review cost reduction within the CRE function
• An approach to real estate optimization and seven key strategies for managing through the downturn
• Lessons learned based on recent client engagements

Companies are Aggressively Looking to Reduce Costs

As companies evaluate their current business situations, they generally fall somewhere across a spectrum from ‘little to no market impact’ to ‘crisis.’ As shown in Figure 1, when the likelihood of market impact is minimal, companies typically engage in incremental performance improvement efforts at the full discretion of management. As companies approach ‘crisis,’ cost reduction initiatives that may have previously been optional or at the discretion of management will become a business necessity.

We see companies focus on three categories to help minimize the erosion of earnings and cash flow:

• Cost Focus: Not surprisingly, the first category is focused on reducing costs, and includes several operational improvements (process delivery, sourcing, etc.), efforts to shift fixed costs to variable, and overall simplification of business models.

• Stability & Growth: Many companies recognize an opportunity to position themselves to emerge stronger from the downturn. Examples include expanding and growing part of the business or product line in a more disciplined manner; proactively managing existing and potential talent; and strengthening planning disciplines.

• Liquidity & Capital: In certain economic sectors, financing challenges are the top priority. Companies focus on aggressive cash management to generate and conserve cash, improving working capital, and establishing greater flexibility on the balance sheet.

Regardless of your current priorities, improvements should be executed as part of a balanced program that prioritizes quick hits, but also aligns broader functional and structural initiatives with overall business strategy. Put another way: The sum of many isolated initiatives across business units or enabling functions will yield limited savings. But by integrating related activities, a compounding effect can lead to more consistent transformation and greater cost savings. For leaders who have seen challenging times, they may also recognize this as an opportunity to challenge sacred cows and materially improve the company on a ‘burning platform’ for change.
An ideal integrated approach may not be possible within many organizations, but CRE leaders shouldn’t be dissuaded from pursuing an integrated approach on whatever scale is achievable (pilot regions, HQ locations, etc.) or within CRE-focused initiatives, in order to begin making changes on their own. Most of the actual work happens in the trenches of your organizations, and CRE-focused activities may not always need to wait on explicit endorsement from integrated, cross-functional teams.

Indicators for the Need to Review Cost Reduction within the CRE Function

There are several ways for organizations to evaluate potential cost-reduction opportunities. Depending on the type of business and portfolio, certain tactics may be more or less important, but assessing your organizations with these questions in mind will help focus your activities as you support cost reduction efforts.

1. Knowledge and information about the CRE portfolio is lacking
2. Portfolio is not aligned with current and future business direction — from physical, location or financial perspectives
3. Supply chain and distribution channels have not been optimized
4. Space utilization and location of facilities have not been challenged
5. Excess properties have not been identified and sold
6. Current market value of properties is not known or is significantly greater than book value or utility value
7. Creative financing structures have not been considered
8. Operating costs have not been effectively measured and controlled
9. Opportunities to leverage volume buying or outsource low-value-added services have not been explored
10. Capital projects are not aggressively bid, and value engineered or change orders are not routinely challenged and controlled

Regular readers of LEADER are familiar with the scale of business impact associated with CRE, but despite this potential, a variety of challenges exist. These include, rising costs (often despite reductions in CRE headcount), insufficient portfolio data, increased cost controls, more aggressive landlord practices, changing business needs, decentralized or reactionary decision-making, misalignment among business units, and issues around the identification, use and reduction of underutilized space.

What to Do Next?

To address these challenges holistically, it is important to addresses all real estate costs, including: cost of acquisition, ownership, operation, and disposal. Such efforts to optimize real estate will take different forms depending on the type of company and its specific challenges, but they will consistently address four spend-reduction levers:

• Real Estate Portfolio: Consolidate into key facilities; dispose of non-essential facilities; improve space utilization through streamlining facility planning/space standards; relocate operations/facilities to lower cost markets
• Cost to Own or Lease:Improve financial structures through lease negotiations (or re-negotiations); execute sale/lease-back agreements; make informed buy vs. lease decisions
• Cost to Service:Reduce operational costs by outsourcing/out-tasking services; conduct lease audits; review tax assessments; manage energy costs
• Cost to Manage:Improve real estate management by improving CRE organizational structure, processes and technology

The downturn is reason enough to assess or re-assess these four levers, but M&A or divestiture activity may also be a catalyst for change, as an organization looks to increase efficiency and optimize the real estate portfolio. In execution, key success factors include strong leadership alignment, a strong internal execution team, continuous communications, and effective project management (including frequent quantitative metrics tracking).

To differentiate and prioritize initiatives, companies typically make evaluations based on the cost reduction opportunity (the savings) against the effort to execute (time or cost). See Figure 2 for examples of where various initiatives might fall against these two criteria.

Most organizations have already explored the ‘low hanging fruit’ projects in the lower left quadrant. While these projects do not require significant effort to complete, they are also associated with lower impacts/benefits. In these challenging times, there are many examples of the CRE function partnering with internal customers and other enabling functions (HR, IT, Corporate Finance, Legal) to take on more challenging initiatives. In these later examples, we see companies achieving 20-30 percent savings targets through aggressive and integrated execution, rather than the more modest savings achieved through isolated projects. Additionally, this new level of integration is required to achieve a different future state and actually make the changes stick.

Seven Downturn Strategies

There are seven cost reduction strategies that savvy CRE organizations are pursuing:

1. Optimize the portfolio; Monetize underperforming or underutilized assets
2. Restructure the CRE Organization; Combine Roles & Responsibilities; Delayer; Tightly Integrate Real Estate &Facilities Operations into a Single Function
3. Implement advanced workplace concepts to optimize the office space portfolio
4. Restructure CRE service delivery model and service levels; Increase outsourcing of commodity tasks
5. Rationalize CRE IT platform; Plan for and implement integrated workplace management solution
6. Centralize control of real estate and facilities assets
7. Establish an enterprise asset management viewpoint to optimize deployment

Note: #5 and #7 could be pursed either jointly or separately

For each of these strategies, look for the online LEADER on the CoreNet Global website. A special graphic outlines the objectives, typical analyses, and value to be expected.

Lessons learned

Whatever your company’s situation or CRE department’s particular challenges, there are a number of lessons to keep in mind:

• Decide how much cost improvement is needed: When it comes to reducing costs, different companies have different needs; The main variables are the breadth of change needed, and the time available to take action and capture value
• Start with the obvious: For many companies, the most immediate cost savings can likely come from streamlining General & Administrative (G&A) functions, and aggressively tackling external spend
• Take an enterprise view: In difficult times, a company should look beyond organizational silos to include cost reduction opportunities across the entire enterprise
• Balance short-term and long-term improvements: During a downturn, many companies can be in such a hurry to cut costs that they end up ignoring some significant improvement opportunities
• Choose the right business model: In some cases, the most effective way for a company to achieve the required savings may be through a transformation of its business model
• Protect strategic investments: In their zeal to cut costs, companies can often make the mistake of slashing investment in areas that are critical to the long-term financial success of the business
• Actively manage change: Once a company has made the decision to transform its cost structure, one of the biggest challenges can be overcoming resistance to change

The structured approach we’ve suggested is a way to evaluate opportunities and prioritize the deployment of resources in these challenging times. Even if you’ve already started initiatives or have clear mandates to reduce cost in certain areas, consider using the indicator list and the seven strategies to assess what else your organization might strive to achieve. As you move into implementation, keep the lessons learned in mind to be aggressive and pragmatic in your approach. It is often this execution phase that distinguishes those companies that fall short from those that deliver on their savings objectives.

Editor’s Note: This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, ‘Deloitte’ means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

About the Authors

George G. Bouri SLCR, MCR, is a Principal with Deloitte Consulting LLP and leads Capital and Real Estate Transformation practice. He advises clients in multiple areas of strategy and operations improvement initiatives, including Strategic Alignment, Business Process Improvement, Technology Enablement, Performance Management, Organization Structure & Design, Workplace Transformation, and Outsourcing Advisory initiatives.

James M. Baker, is a Manager with Deloitte Consulting LLP in their Capital and Real Estate Transformation practice and has more than 10 years of industry and consulting experience working with private- and public-sector clients on a variety of real estate and workplace related initiatives.

Francisco J. Acoba SLCR, MCR, is a Senior Manager with Deloitte Consulting LLP in their Capital and Real Estate Transformation practice and has more than 12 years of experience providing management consulting services to corporate real estate organizations within Fortune 500 companies and many of the world’s largest public sector entities.

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