This is what every Board Executives have been overlooking in property assessment

Although property is usually the second largest operating cost for an organisation, very often Board Executives have incomplete knowledge of how well their property assets are being managed or how they perform against their competitors.

As a result, when cost reduction moves up the boardroom agenda, it can be very difficult to set clear and achievable objectives to help save on property costs.

On average, the real estate portfolio of an organisation accounts for at least 10% of the overall total operating costs. Typical expenditure in this space will break down as follows:

Staff - 80%
Property - 10%
Travel - 4%
IT - 2%
Insurance - 2%
Others - 2%

However, case studies have also shown that the way in which property is managed can have a major influence on the largest other proportion of operating costs: staff. By adopting a more pro-active and performance managed approach to how a real estate portfolio is managed, it is possible to both reduce property costs by over 10% and significantly increase staff productivity.

With property a fixed asset, we find that organizations do not always make decisions around property early enough to achieve the maximum possible benefit. This can often lead to a disconnect between the business needs of a firm and the physical real estate in which it operates.

To achieve a step change in the way property supports and even enhances core business activities, a few key issues need to be examined; what does a business really want from property asset management? How does it ultimately measure the success of property spending? When should the decision be made to maximise the benefit?

There are several elements to effective property management yet too often we see companies adopt a strategy that is heavily focused on individual areas rather than consider how cost savings can be made across the full spectrum. In the current economic climate a much more integrated approach is required and involves two key steps – pinpointing all of the individual areas where costs are incurred and then identifying the strategies and tactics that should be deployed to make sustainable savings in each area.

This approach then needs to be applied across the organisation’s entire real estate portfolio and rigorously implemented throughout the whole lifecycle of each asset.

Moving from theory to practice

The first thing corporates need to understand is where operating costs are incurred on their real estate portfolio. Whilst there’s no single version of the truth, recent EC Harris research based on real client data has shown that this typically breaks down as follows:

Rent - 45%
CAPEX - 20%
Utilities - 8%
Repairs & maintenance - 6%
Cleaning, securing & reception - 8%
Property related staff - 4%
Others - 9%

Having identified, measured and understood their cost base, an organisation can begin to consider the changes that will help them to deliver savings in each area. Given that rent is often the biggest outlay on a property balance sheet, it’s an obvious area to start.

Some of the key strategic questions that a property team and the Board need to consider include; are we fully utilising all of our space? Is there a scope to reduce our footprint? Does everyone need to be based in a central headquarter?

Could back-office functions be relocated to a more cost-efficient location? What impact would simple measures like flexible working or hot-desking policies have on the rental space required?

These types of questions don’t just impact on rent either. For some of our clients we have seen the implementation of an effective workplace optimisation strategy reduce churn, energy, water, statutory waste and other costs. In this instance, changes in how the asset is managed are not only delivering an impressive financial return, but also significant environmental impact which will be particularly important if carbon reduction targets become mandatory across the built environment.

Another area where there is scope to deliver significant operating cost reduction is through a more efficient use of consultants, contractors and suppliers. Many businesses will outsource repair & maintenance activities, cleaning and security duties across each of their assets in their wider real estate portfolio.

Whilst outsourcing is typically a cost-efficient tactic, there is still a need to ensure that third parties are being deployed in the most effective manner possible. By exploring options such as contract bundling, predictive maintenance and demand analysis there is an opportunity for a business to further reduce operating costs.

The case for a Chief Property Officer (CPO)

Given the percentage that property contributes to the overall operating cost of a business, there is a valid argument that a corporate’s Head of Property merits a place on the company Board. The case for a CPO is even stronger when you consider that property can be a significant source of competitive advantage in terms of location, speed to market, flexibility, brand protection and productivity.

That said, a CPO would need to be able to align with the Board by focussing less on service quality and more on outlining how actions taken have impacted the business in terms of the P&L margins, the balance sheet, cash flow, staff retention, staff productivity, brand and customer loyalty.

In order to have a discussion of this nature, they also need to have an effective asset management plan, relevant metrics, quantifiable improvements and the ability to report back at a Board level.