STRATEGIC ALIGNMENT NICE TO HAVE OR A BUSINESS IMPERATIVE?
Historically, business has only focused on its property infrastructure in times of dire need or juicy transactions. But times are changing and the need for operational agility is driving the need to find a new, more strategic property executive to place the organisation in a position to achieve corporate success.
Twenty years ago companies were introduced to the idea that property decisions could play a significant role in corporate success. In those early days, the argument was straightforward but compelling – property, exceeded only by personnel expenses (and now technology) represented most companies’ second or third largest expense. Control that expense effectively and savings dropped straight to the bottom line. Since then the relationship between property and business success has grown far more complex – not least because of technological changes, shortening product life cycles and globalisation. The international emergence of “Corporate Real Estate” (CRE) as a strategic and operational discipline has been in direct response to corporations’ need to address this important relationship, and has placed a greater emphasis on the traditional facilities managers use to act pro-actively to keep their organisations’ core business on track – and preferably ahead of the curve.
Consequently, the key challenge facing CRE executives in any organisation is not to be caught napping by unforeseen business strategy changes. Sudden or constant change in business models is often the result of factors and initiatives that play themselves out in an environment or network that is “off the radar” of the CRE executives’ day-to-day activities. Driven by various factors such as a local catalyst, globalisation, innovation of products and business models, technology impacting the way business is done, changing requirements of risk management or some other unforeseen happening, these changes bring instant challenges to the role of those charged with the responsibilities for aligning the business with the infrastructure that supports it.
In many industry sectors today, the leaders of business, if pressed on the point, will agree that they are not totally certain how they will be “going to market” in three to five years time. They are uncertain as to the exact nature of their products. They are uncertain which business units may be sold off. They are uncertain which competitor they are likely to merge with or be taken over by. However, because of the long-term nature of property commitments, whether leased or owned, the challenge of providing corporate agility in the face of change is becoming ever more daunting. For the CRE executive “not being caught napping” can take many forms but includes having too much property (again, owned or leased) in a slowdown or consolidation; having too little exposure to property and key markets in a booming market when the primary objective is acquiring market share and skills; having property in the wrong locations (for example in Zimbabwe rather than Angola or others); and worst of all, having property cost structures that are excessive or significantly above those of competitor companies in the same market place.
The good old days of constant incremental change are long gone and the challenge of this uncertainty is evolving into a major property industry paradox. The property supply side has largely been built on investment and finance models focused on long-term corporate commitments. Up to now, the CRE executive has been focusing on cost reduction and outsourcing strategies to assist in driving corporate performance. But now flexibility is becoming a dominant factor in their planning. How do they cope with this new uncertainty? What are the options for providing corporate agility? The industry’s customer, the tenant who pays the rental bill, is looking for a different model and these changing corporate business needs and entrenched real estate business models are the key to this industry paradox. CRE executives are being mandated to ensure that short-term and flexible occupancy strategies are implemented, which allow the firm to remain agile in the face of rapid change; but also to continue reducing occupancy costs that – since property costs are inversely correlated to length of term – usually means committing to long-term leases or ownership.
More importantly – and emanating from our earlier article – the CRE executives are also facing a deeper challenge. How do they link into the corporate executive suite to get an understanding of the changing corporate directions that dictate major corporate infrastructure adjustments? Previously, because of the old secure incremental change business model, CRE executives have tended not to have a seat at the boardroom table. The only time property was discussed at this level was when exciting new transactions were on the table, but this is no longer sufficient. So how does the CRE executive keep track of potential new corporate thinking and changes in directions? Certainly waiting for instructions from business units is not going to address the issue adequately, and the CRE department will undoubtedly be caught napping if this approach is followed. A much more proactive, on-going, multi-pronged approach is essential, whereby the CRE operations need to integrate with the broader business strategy, and work with other elements of corporate infrastructure.
First, the CRE executive has to be totally in tune with the “business of the business” itself – understanding the industry, all the business drivers, opportunities, issues, challenges and threats. In some organisations there is now a requirement for CRE executives to “do time” in the operational sharp-end of the organisation. Be it sales or marketing, product innovation, finance or whatever, extended periods within these groups are a requirement before being entrusted with the responsibility for the corporate real estate portfolio strategy. Although this may work for a global organisation – can it work in SMEs? Can they afford the luxury of such extended executive education programmes? Part of the solution is ensuring that property is intimately linked into the other parts of the corporate infrastructure support groups. These are likely to include HR and IT, but may also include finance. These groups together control and manage the resource base of the organisation – resources which in many cases are interchangeable. Virtual offices can replace property bound workplaces. Contractors working off-site can replace permanent employees in the office. IT is now the key mode of business linkage.
However, even more important are relationships. To be successful and not get caught napping, CRE executives need to develop both formal and informal networks at all levels within all the business units. With this intelligence, the CRE department can anticipate and plan for change long before a decision is made at the highest level. The use of techniques such as scenario planning is particularly useful, but not for forecasting and developing portfolio strategies. Rather their strength is in testing the rigour of the real estate portfolio and risk management strategies. How will these be able to respond to the unfolding of market changes and various corporate decisions? How do these accommodate the ability to exit and expand rapidly without being a liability to the organisation?
There is an important need for the development of CRE executives with an informed perspective and understanding of both key business issues and the long-term nature of real estate commitments. To be successful, they need to become involved in formulating corporate strategy on a formal or informal basis. In this role, the “co-creation” of strategies with the various business units will be a key factor in understanding and managing the role that property plays in the successful development of core business strategy, where, in addition to key areas of speed to market and corporate agility, further aspects requiring the need for informed “strategic alignment” range from initiatives that place corporations in locations that enhance recruitment and retention of the best people, to building layouts that promote effective workflow and communication and on- and off-site workspaces that support new ways of working.
Dave Owen CA(SA), BCom, Dip (Acc), is a member of the Coronet Global and Fellow of the Institute of Directors.