Towards Optimal Efficiency
B
y Vik Bangia
For the past twenty years, the mantra in the real estate service provider world has been “cost savings.” Most service provider firms in this industry say they’re experts on delivering real estate solutions that result in bottom line savings. Whether the savings is related to occupancy expenses, energy, or operating expenses, their stated goal is to reduce real estate spending. However, with any line of thinking, what starts small often goes to extremes, and what has transpired in this industry has damaged both client corporate real estate (CRE) organizations and service providers alike.
In the zeal to cut costs, CRE organizations made several missteps over the years. In the 90s they over-outsourced their real estate departments and dramatically reduced headcount; often losing institutional knowledge along with the layoffs. Service providers, in a similarly zealous effort, made recommendations that reduced short-term spending but neglected long-term implications especially in the changing economic times and challenges such as the 1990s recession, turn of the century dot-com era, and our recent (and continuing) economic crisis. The result was a glut of office space, scope creep on outsourcing engagements, and a push by corporations to compress service provider fees. This has commoditized the real estate services industry and made it more difficult for corporations to get what they needed all along, sound advice.
Instead of looking back at what could have been done differently, I’d like the industry to look forward about how to think differently about what cost savings really means. And as usual, I don’t turn to the readily available commercial real estate publications. Instead, I go back to the basics and open up my college physics book.
In physics, the optimal performance of any system is a range in which the system performs best. In corporate real estate, for simplicity, if you define this range as a line, the optimal efficiency of a corporate real estate department is achieved by bringing the organization closer to the line (see graphic below). Working against optimal efficiency are certain internal and external factors. External factors, among others, may include: the economy, competition, politics, regulatory issues, and public perception. Internal factors, among others, may include: vacancy, demand for space, attrition, asset value, and the company’s own business strategy.
In traditional real estate brokerage, an assumption tends to be that every optimal transaction creates an optimal portfolio. But a true real estate advisory approach considers the real estate portfolio as a “system” in which the optimal efficiency of the whole is paramount, and individual decisions are made with the system efficiency goal in mind.
This system framework is created by recommending and implementing the right combination of outsourced support services, CRE organizational design, internal processes and workflow, best practices, communication, internal customer relationship management, and both internal and external benchmarking.
The system then looks to define the optimal framework for decisions by developing space standards, communication and reporting protocols, financial and business controls, and performance measures.
In 2010, consider your real estate portfolio as a system which should be managed with a system view to efficiency. If you’re thinking about a new real estate service provider relationship, be sure to ask questions of your service provider candidates that go beyond the traditional day-to-day or deal-by-deal approach. If you’re looking for questions to ask, write me at vbangia@cresapartners.com.
Tags: cost savings, optimal efficiency, real estate portfolio
This entry was posted on Wednesday, January 6th, 2010 at 9:00 am and is filed under National Accounts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
Nice job!