Align real estate and business strategy but don't get caught out
The emerging challenge of Corporate Real Estate executives in any organisation is not to be "caught out" by unforeseen business strategy changes. Sudden or constant change in business models can be 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.
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 real estate 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 out" can take many forms but includes having too much real estate (owned or leased) in a downturn or consolidation; having too little real estate in a booming market when the primary objective is acquiring market share and skills; having real estate in the wrong locations (for example in Chicago rather than India); and, worst of all, having real estate costs that are excessive and significantly above those of competitor companies in the same market place.
But with discontinuities occurring constantly and ever more rapidly, this is becoming more and more difficult to achieve. The good old days of constant incremental change are long gone.
The challenge of this uncertainty is evolving into a major real estate industry paradox. The real estate 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 paramount. How do they now 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.
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 short-term and flexible occupancy strategies are implemented that allow the firm to remain agile in the face of rapid change; but also to continue reducing occupancy costs which – since real estate costs are inversely correlated to length of term – usually means committing to long-term leases or ownership.
But the CRE executive is also facing another 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 board table. The only time real estate was discussed at this level was when exciting new transactions were on the table. But this is no longer good enough.
So how does the CRE executive keep track of potential new corporate discontinuities and changes in directions? Certainly waiting for instructions from business units is not good enough. The CRE department will undoubtedly be "caught out".
A much more proactive, on-going, multi-pronged approach is essential. Firstly, 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 of the corporate real estate portfolio strategy. Although this may work for a global organisation – can it work in the SMEs? Can they afford the luxury of such extended executive education programs? Part of the solution is ensuring that real estate 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 this new corporate work are in many cases interchangeable. Virtual offices can replace real estate 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 out", 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 the decision is made at the highest level.
The use of techniques such as scenario planning are particularly useful, but not for forecasting and developing portfolio strategies. Rather their strength is in testing the rigor 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? Because of the CRE executive’s perspective and understanding of the long-term nature of real estate commitments, they are becoming involved in formulating corporate strategy on a formal or informal basis.
In this role, the "co-creation" of strategies with the various business units is becoming
key to not being "caught out". In closing, it is interesting to contemplate the industry supply-side response to the new dictates of their customers, the tenant paying rental in their buildings. Will existing models evolve that can accommodate corporate agility requirements? Or will new intermediaries emerge that have business models that are based on the need to provide flexible occupancy arrangements? Will the traditional industry supply-side players be "caught out" by the emerging dictates of their rental-paying customers? Maybe these industry players should do some scenario planning themselves.
