- Internal distribution only. Corporate Real Estate and Facilities Cost Reduction

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1 - Internal distribution only Corporate Real Estate and Facilities Cost Reduction Summary By moving from typical to best practice, organisations can improve value for money and reduce their real estate and facilities costs by 15-20%, whilst still improving services. Successful cost reduction in corporate real estate and facilities depends on addressing both demand and supply side factors. Properly targeted, it can also support the achievement of sustainability objectives. Key enablers for enduring success are: an appropriate operating model and strategy for corporate real estate provision; an effective governance regime for managing and prioritising new space and service requests; consistent application of fit for purpose standards for both space and supporting services; and accurate property and service data to provide the necessary management information. This paper sets out an overview of the challenges of real estate cost reduction, where to look for savings and the results that best practice real estate and facilities management can achieve.. Introduction Market conditions have pushed cost control to the top of the corporate agenda. The area of corporate property has been given a special focus as it typically represents 10 20% of the cost base. A recent survey of corporate real estate executives identified cost reduction as their number 1 priority, with 98% of respondents expecting greater cost pressure in the coming months 1. 1 Real Estate Executive Board Research 2007 & 2008 IBM Corporation April 22, 2010 Page 1 of 8

2 Common pitfalls Real estate cost reduction can be fraught with difficulty owing to existing operational and contractual commitments. Against this background, there are two potential pitfalls which executives with a cost reduction imperative face when focusing on real estate and facilities management (FM). They may be tempted to press ahead with short-term savings targets, seeking quick wins without fully understanding the potential impact on the level of support provided to the core business. Conversely, they may decide that real estate and FM are too difficult and focus on other areas of cost saving instead. Experience shows that although some costs can be reduced in the short term, achieving significant, sustainable savings (up to 30%) is complicated and needs careful planning. Our experience is that the greatest savings come from effective demand management combined with working with suppliers in a competitive environment to achieve mutually agreed objectives. This approach typically yields the most sustainable savings and the greatest benefits. Real estate and facilities cost drivers In order to reduce real estate and facilities costs it is necessary to understand the cost drivers. These are set out in the figure below. The Drivers of Real Estate and Facilities Costs Real Estate Cost = ( Headcount x Cost/m 2 x m 2 /head ) + Cost of surplus space Cost drivers Changes in the commercial environment Legend: = Demand driven = Supply driven Location Specification and Service Levels Financing Procurement Policies and Space Standards Ways of working Portfolio Planning Flexibility Industrial Cost = Unit x Cost/m 2 x m 2 /Unit ) + Cost of surplus space Most of these drivers relate to demand, so it is critical that any real estate cost reduction initiative takes full account of demand as well as supply factors. IBM Corporation April 22, 2010 Page 2 of 8

3 Demand drivers At the highest level, real estate costs are driven by the location, specification and type of space occupied as well as the volume occupied. Activities undertaken in high-cost, city centre locations will generate costs that are typically 3 6 times greater than in cheaper suburban and provincial locations, hence the potential for relocation to bring cost savings in the longer term. Costs also vary by property type. For example warehousing is typically 2-3 times cheaper than office space. Therefore matching business requirements to the correct accommodation type is important, e.g. using remote archives for bulk document storage, rather than devoting large areas in city centre office buildings has obvious benefits. The volume of space occupied is critically important. Costs such as rent, rates, cleaning, heating and lighting are all usually a direct multiple of the volume of space occupied. Hence setting and enforcing standards for space allocation, to provide enough space (and no more) for the business activity or job functions, with realistic allowances for support functions (e.g. storage, meeting areas), is key. Flexible ways of working, such as hot-desking and remote working, can also significantly reduce the demand for space, and therefore cost. The organisation s overall need for space can be reviewed and consolidated in the light of these measures to release surplus space. When space is vacated, empty space must be managed proactively and disposed of as quickly as possible to minimise ongoing liabilities (or, in the case of freehold property, realise capital receipts). Continuing on demand drivers, facilities services costs (e.g. cleaning, energy, security, catering and reception services) are affected by the range of services demanded and the standard to which they are required. Ensuring that there is an ongoing business need for each of the services supplied and a consistent set of standards against which they are delivered is critical. In most situations a review of service requirements and standards in conjunction with business unit representatives can be used to identify areas where delivered services are out of alignment with current business requirements, e.g. a decision might be made to cease particular services, to amend the frequency of cleaning or the speed of response to minor repairs, and hence realise appreciable savings. Supply drivers The operating model for the real estate and facilities management team should also be considered. In large organisations there can be a tendency for each division to develop its own real estate management function. This can result in a duplication of similar groups in different parts of the businesses and potential inefficiency. In such circumstances, consideration should be given to setting-up a shared service for real estate and facilities. This can operate as a centre of expertise for the organisation as a whole, and act as a champion for reducing real estate-related operating costs and improving efficiency. As part of any cost reduction exercise, the opportunity should also be taken to achieve the appropriate balance between internal service delivery and outsourced delivery by external services partners. Supply markets have developed significantly over the past 10 years and a much wider range of property and outsourcing options is now available from increasingly capable suppliers. IBM Corporation April 22, 2010 Page 3 of 8

4 For example greater flexibility is now available in real estate supply contracts, therefore procurement options such as serviced offices or short-term leasing of warehousing or storage space to match particular short-term business project are now practicable options. Such flexibility typically comes at a cost, but this is likely to be much cheaper than for example entering into a long term lease and then incurring empty property costs when the business needs to exit the space at the end of the short term project or business activity. The financing of real estate and facilities is also worth reviewing. For companies with strong balance sheets wishing to unlock capital from their freehold portfolios there are a variety of options enabling them to do this ranging from structured sale and leasebacks, through to PFI style transactions where a single service provider will take ownership of the assets and provide fully serviced space in return for a monthly or quarterly fee. Conversely the current market conditions can provide good opportunities for leasehold occupiers to buy-in freeholds if they wish to extinguish their rental liabilities and gain the advantages of ultimate flexibility and control that this confers. Finally a review of internal arrangements for passing occupancy costs to occupying business units is also worthwhile. Business units faced with an internal charge for their accommodation and service provision are typically more economical in their use of space. Once an organisation is clear about what real estate and facilities services it requires and the accompanying specifications and service standards, including the flexibility requirements and how it wishes to finance these it can then review its procurement arrangements. It is not unusual to find a large number of fragmented contracts for commodity services such as cleaning or maintenance as well as non-commodity areas like professional services. Consolidation of such contracts with fewer suppliers and retendering will normally result in further savings. Environmental sustainability and cost reduction Environmental sustainability is an increasing area of focus in most organisations. Real estate and facilities is typically a major contribution to the overall carbon footprint, and the measures to mitigate this often complement a cost reduction agenda. Taking action to streamline a real estate portfolio and rationalise service delivery will usually contribute to a significantly reduced carbon footprint (e.g. through less space to heat and maintain, more efficient delivery of facilities services) as well as lower energy and utility bills. If facilities management service specifications are being re-written as part of the cost reduction exercise and the underlying contracts are to be renegotiated, then the inclusion of sustainability parameters may well be possible as part of the overall exercise at nil or minimal cost as most suppliers are now keen to demonstrate their enthusiastic acceptance of this agenda. How to achieve sustainable cost reduction A rapid cost reduction diagnostic can identify areas for both short term tactical savings and more strategic longer term measures. A typical output from such an exercise, identifying and prioritising cost reduction opportunities based on their potential benefit versus the cost and effort required to implement them is shown in the figure over the page. IBM Corporation April 22, 2010 Page 4 of 8

5 Real estate cost reduction diagnostic typical output High Review asset utilisation & profitability monitor & manage utilisation use sites more intensively minimise voids Dispose of existing surplus Benefit New demand management processes e.g. revise internal charging = Demand driven = Supply driven Low High Challenge capex programme New policies & standards Existing capacity Required pain threshold Low Re-procure FM consistent specification leverage economies of scale outsource Other proven methodologies include Category Management and Capital Programme Management Capability Accelerators to drive out benefits from procurement initiatives and capital programmes. The following typical implementation activities would be undertaken in a cost reduction assignment: Review of the core business needs and strategic priorities, to update, confirm or create a real estate and facilities strategy including flexibility requirements which will support the core business and provide longer term sustainable savings. Review current supply and demand for accommodation and services to identify mismatches Consider whether there is scope to introduce alternative working arrangements, e.g. redeploy retail inventory to supplier, shift working, move to open plan office environment, mobile working, hot-desking etc Ensure space allocation standards are right for the business activity and / or job function and applied consistently Identify the optimal accommodation portfolio and a migration plan to release surplus or under-utilised space Ensure required facilities services are specified to a standard that meets business needs and terminate any redundant services Review of financing arrangements for real estate and facilities Review procurement arrangements and renegotiate or re-procure as necessary to achieve optimal service arrangements (e.g. one financial services client had 3 separate firms of cleaners working in the same building) IBM Corporation April 22, 2010 Page 5 of 8

6 Review opportunities for improving the efficiency of the internal real estate and facilities management function (e.g. by adjusting the balance between direct work and outsourcing, and, in larger organisations with multiple property teams, considering the case for creating an Estates Centre of Excellence ) Design and embed appropriate governance, and in particular demand management, processes to ensure that savings, once achieved, are sustained, and that new provision is only made for prioritised business requirements. It is vital that the cost reduction initiative has effective programme management and governance arrangements. This ensures that the various initiatives are properly coordinated and anticipated benefits are delivered, but it also provides an effective process for resolving business issues and concerns related to the programme. Success stories IBM has progressively streamlined its own real estate portfolio and realigned its internal facilities standards, to drive out savings in partnership with its suppliers. This has provided us with opportunities to develop innovative approaches for the benefit of our clients. The diagram below illustrates our recent performance in reducing costs. Jun 2005 Jan 2006 Jan 2007 Jan 2008 Jan % Saving 10% 12% 17.1% 19.1% 21.1% Source: IBM RESO Real estate and facilities costs, UK & Nordics Region The support that IBM has provided in the implementation of the new shared service centre for real estate, fm and capital projects coupled with the re-procurement of new contracting arrangements has led to savings which remain on target to exceed 40 million a year. We worked with the business and the supply market to optimise service specifications, re-tendering the work against the new specifications to receive the most competitive prices. To increase the future sustainability of the savings, we provided improved demand control and management information systems and processes. IBM Corporation April 22, 2010 Page 6 of 8

7 IBM Corporation April 22, 2010 Page 7 of 8

8 Global Manufacturer The client appointed us conduct a review of their European facilities management costs in seven markets and to develop a strategic sourcing strategy. We were then asked to help implement the strategy, to achieve recurring savings of 12% of total costs through contract re-specification, supplier consolidation and new internal management processes. Contact details: Andrew Carey Associate Partner Mobile: +44 (0) andrew.carey@uk.ibm.com Sam Monger Associate Partner Mobile: +44 (0) sam.j.monger@uk.ibm.com Trevor Miles Senior Managing Consultant Mobile: +44 (0) trevor.j.miles@uk.ibm.com IBM is a registered trademark of International Business Machines Corporation. International Business Machines Corporation 2009 All Rights Reserved. IBM Corporation April 22, 2010 Page 8 of 8