Bottom line: lost in space.

At first glance, Northern Telecom's move into its new headquarters in Brampton, Ontario, may look like just another example of corporate collaboration: The company had a spatial itch, and its real estate arm scratched it. But on closer inspection, the maneuver emerges as the epitome of a new way of thinking one in which the cooperation between corporate and real estate resembles the mutual effort of a three-legged race, instead of the together-but-separate campaign of a relay: where corporate objectives and real estate decisions are inseparable; where CEOs don't so much delegate as quarterback.

For Nortel, as for many companies that are beginning to catch on to the crucial role real estate plays in their operations, the result has been increased productivity and decreased costs. In short, rethinking real estate translates into a punched-up bottom line.

Here's how Nortel did it: In the early '90s, Nortel began looking for places to house its growing white-collar population. At the time, its Toronto-area operations comprised four sites - three leased buildings that were overcrowded with knowledge workers and a factory in Brampton the company owned, but needed less and less as the telecommunications industry became more service-oriented than product-driven. The real estate division suggested converting the factory to white-collar use. Management didn't buy that: The million-square-foot factory was a concrete-slabbed, horizontal monstrosity that hardly resembled the towers and "campuses" knowledge workers expect.

Then, in 1993, after 20 years of growth, the company posted a $1 billion loss, forcing it to rethink the way it did business. A new leadership team stepped in with thoughts of innovation and reinvention. Says Roy F. Dohner, Nortel's vice president of real estate, "One of the things our CEO asked was 'How do we make our real estate more valuable to the company? How do we change it from a place to house employees to an asset that helps us reach our objectives?'"

Nortel's then-CEO Jean Monty and its then-COO, current Chief Executive John Roth, were looking to Nortel's real estate to boost the company's performance and send a clear message of change to its customers, stockholders, and employees. Instead of spending $150 million on building new digs, they pumped $50 million into remodeling the Brampton factory into a modern structure of open work areas, private offices, production facilities, and amenities, in which everyone from top executives on down could work comfortably and effectively. The 30-year-old factory became the company's shining new headquarters, garnering awards for innovation and design from organizations like Business Week and the American Institute of Architects. More to the point, operating costs plummeted from $60 per square foot at its Toronto locations to $25 per square foot in Brampton. Through this and other real estate-related belt-tightening maneuvers, the percentage of total revenue Nortel spends on all occupancy plunged from 7.4 in 1993 to 4.3 in 1997 - a reduction of a staggering $480 million on the company's $15.5 billion in 1997 revenues.

"Real estate used to be something CEOs sort of tolerated," says Roth. "Now it's something to manage and make work for your company." "That's a lesson many top managers just don't want to learn," says Martha A. O'Mara, a professor of real estate development at the Harvard University Graduate School of Design. "Executives hate having to incorporate real estate considerations into their business agendas," she says. And no wonder: Corporate America and the real estate industry have always behaved like fifth-grade boys and girls at a dance, sitting on opposite sides of the room, occasionally mingling only to appease the powers that be. How else to explain the reason each discipline speaks its own language? Or that universities separate their real estate schools from their business schools? The consequence of this division is that CEOs have traditionally paid little consideration to the role of real estate in bottom-line economics. To them, real estate was simply a necessary evil.

"The key word is 'necessary,'" says O'Mara. "There was a time when providing a place with certain, well-defined provisions for workers was rudimentary. It was necessary, and the boss had few options." In terms of strategic and financial significance, real estate was a no-brainer. Now, innovations in technology, employee motivation, and distribution (to name a few) have unmoored those old notions and left virtually everything about place up for grabs. For instance, instead of calculating the number of office workers by an arbitrary amount of floor space for each and telling your real estate people to "find me this much room," you must now consider the possibility of incorporating Alternative Workplace Strategies (AWS) - a fancy term for telecommuting, hoteling, using open-area workstations, distributing your personnel among small satellite offices, and all those other ways people have found to get the job done away from the traditional worksite.

"There are now an infinite number of ways to structure a work force, schedule production, and deliver a service or product," points out Mitchell Moss, Henry Hart Rice professor of urban planning at New York University and director of its Taub Urban Research Center. "CEOs have to consider every one, because every one affects the type and size and location of a company's properties. And the effectiveness of a company's real estate, in turn, has a direct and immediate impact on profitability."

One reason is the skyrocketing cost of possessing space. Typically, the cost of occupying and maintaining places of business is one of a company's biggest expense categories, second only to personnel costs (technology costs run a close third). Finding, designing, leasing, constructing, improving, repairing, heating, cooling, lighting, cleaning - capitalized or not, it all costs big bucks. According to "Global MarketBeat," a report issued by Cushman & Wakefield, a real estate services company based in New York, you'll fork over an annual occupancy cost (rent, property taxes, utilities, and such) of about $39 per square-foot in San Francisco, $42 in Sao Paulo, $48 in Frankfurt, $84 in Tokyo, and a whopping $122 in London's West End. Multiply these figures by the millions of square feet major companies demand and you start to see the big picture in hues of currency-green.

With numbers like these beating down on the bottom line, companies are scrambling to find new ways to trim real estate fat and make floorspace pull double and triple duty. Take IBM. Aiming to reduce real estate costs, Big Blue initiated a virtual office program in 1994 that allows members of its sales force to share offices, telecommute, and work at customer sites. Ten thousand of its U.S. employees now work this way, giving the sales division an employee-to-workspace ratio of 4:1. According to Bob Egan, project executive for IBM Global Sales and Distribution, the program reduced the company's space needs by 7,500 workspaces and 2 million square feet, resulting in $75 million in annual savings. Quantifiable savings like IBM's and Nortel's are impressive enough, but adding the less tangible concept of "productivity improvement" to the real estate mix ups the ante considerably. "It's sheer folly to think the design, size, layout, and atmosphere of business facilities don't have a direct beating on employee morale and productivity," cautions Kit Tuveson, chairman of the International Facility Management Association (IFMA) and manager of worldwide facility operations for Hewlett-Packard. There's certainly enough evidence to prove the point. For example:

* When Herman Miller SQA remodeled its headquarters building in Zeeland, MI, incorporating an open design that allowed its 600 manufacturing workers to mingle with its 120 front-office staff, order-to-shipping time for its custom business furniture dropped from several months to two weeks. The improvement in cycle-time represents a customer service boon since Herman Miller SQA's business is directed at companies undergoing restructuring and change.

* According to PdK Consulting, a Zeeland, MI-based management consultancy, the benefits of small reductions in occupancy costs (which land on the bottom line dollar-for-dollar), pale next to the benefits of small gains in productivity that more motivating or efficient facilities can stimulate. For example, assume the total annual facility cost per occupant averages $7,185 (according to IFMA's "Benchmarks III" report, 1997). Assume the ownership cost of technology per employee is $7,695 (PC magazine, May 1998). Therefore, a 1 percent decrease in both costs means an additional profit of $150 per employee. Now assume knowledge workers generate about $150,000 in annual revenue. A 1 percent increase in productivity means additional profit of $1,500 per employee - which means 10 times the profit has been generated through a reduction in facility costs.

* Ninety percent of the 200 decision makers at 100 fast-growing small- to mid-size companies and 100 of the largest 1,000 corporations believe better office design can improve worker productivity, according to a 1997 survey by the American Society of Interior Designers. Sixty-eight percent of respondents said they had increased productivity and decision making by placing group members together, resulting in reduced development and production cycles and increased profits.

* Now, don't start thinking design is limited to the carpet color and wallpaper pattern, though it is indeed those things as well. Facility design encompasses architecture, traffic patterns, worksite placement and size, where the walls and windows go, the proximity of managers to workers. "It's all lumped into that thing we call real estate," says NYU's Moss. "The term refers to everything that has to do with place and space. It's broad and can be very complex, affecting many aspects of a business, which is why CEOs need to know about such things."

And more, says Wayne Etter, LaGuarta professor of real estate at Texas A&M University in College Station, TX. "CEOs need to pull such information [as how real estate affects productivity] into their everyday business decisions." The trick is to stir all the other pots you have brewing, while keeping real estate simmering on the back burner - and in the back of your mind. For many CEOs, that may mean simply bringing their real estate director or facilities manager into the loop much earlier than before. Perhaps you'll learn that your special-use rooms can't accommodate an envisioned new product, changing the timing of development or putting the wheels in motion for a move or scrapping the idea altogether. Who knows? You won't unless you think to ask. "Once a CEO embraces real estate as an integral part of his business," says Etter, "you start seeing a synergy develop within the company that wasn't there before."

Amazingly, one real estate guru estimates that only three in 10 CEOs are truly aware of real estate's increasingly crucial role in overall profitability and manage with real estate considerations in mind; the executives who do - among them, O.P. Kallusvo at Nokia, Robert Selander at Mastercard, Jim Davis at New Balance, Rich McGinn at Lucent - have reputations for being hands-on, visionary bosses. Chief executives who aren't on this short list of realty-minded leaders most likely know who they are. After all, 86 percent of those responding to the survey by the American Society of Interior Designers say it is important for their companies' facilities to reflect flexibility, adaptability, and forward-thinking - but only 15 percent say their office currently portrays that image. If such a dichotomy exists in your organization, maybe it's time to re-examine your attitude about real estate and the role it plays in profitability. Other clues that it's time for an attitude adjustment include:

* The fundamental way your people work and the physical layout of their worksites haven't changed in the past half-decade.

* The duties of your real estate director or facilities manager tend to be more tactical than strategic; that is, his or her role is that of a facilitator, not a goal-setter.

* You haven't seen a real estate audit or portfolio analysis recently. The space your company possesses, how it's used and where, ought to be as important in your decision making as the quantity and skills of your workers.

* You're not absolutely convinced that every square-foot your company possesses is contributing to profitability-whether through enhancing the corporate image, boosting morale and productivity, or housing people, equipment, and records in the most effective way.

* You think of real estate as a liability instead of an asset.

Hold on a minute, you say? Shouldn't most of these things be delegated? Not completely, not anymore, say experts like O'Mara. "Real estate is too important and too pervasive," she says. "It touches on human resources, production, sales and marketing, finances, customer, vendor, and shareholder relations - everything. It takes a CEO's bird's-eye-view to coordinate it, to plan it, to make sure it not only fits in with everything else a company is doing, but helps those other areas achieve their goals. That's not to say CEOs should don the mantle of real estate director. But no one else can survey the corporate landscape the way the CEO can, weighing the real estate needs of today against those of tomorrow, balancing the spatial demands of one division with those of another. "How CEOs should handle their company's real estate is not so different from the way they already handle their other resources," says NYU's Moss. "It's just a matter of recognizing real estate as a resource, and a valuable one. Many haven't been doing that. When they do, I suspect a lot of people will be pleasantly surprised by the results."

RELATED ARTICLE: The Outsourcing Alternative: Thinking Outside the File Cabinet

For corporations whose main business is not real estate, outsourcing non-core tasks includes finding an outside firm to handle their real estate-related needs. Real estate outsourcing falls into two broad categories: transactional and operational. The first tends to be project-oriented, such as construction management projects, architectural engineering projects, and real estate transactions. Illustrating this type of outsourcing is the recent experience of a software firm. This particular company had grown at breakneck speed into global territories. It asked Cushman & Wakefield, a New York-based real estate services company, to assess its international holdings and make recommendations. Cushman & Wakefield inventoried the software firm's real estate and compared it to its growth, work force, and production needs. After presenting its findings, C&W was contracted to another transactional project - to sell the real estate C&W had identified as surplus. A year later, $54 million of surplus inventory had been sold and the software company's annual occupancy costs had been reduced by $8 million.

Operational outsourcing includes such day-to-day duties as building maintenance functions, housekeeping, groundskeeping, and even mailroom operations. Typically the first thing an operational outsourcer does is assess the operational needs of its client and suggest ways to immediately trim costs: Are the heating and cooling systems, temperatures, and timetables of operation efficient? Can the few people who work a night shift consolidate into one area of the building to save utility costs in the other areas? The next thing an outsourcer will usually do is take over the purchasing of building maintenance and cleaning supplies to take advantage of its economies-of-scale leverage. Cushman & Wakefield, for example, purchases for 200 million square-feet of floor space for its clients in the U.S., a number sufficient to garner the best possible prices.

While many companies do report huge savings by farming out operational tasks, that's not always the key reason to outsource. In fact, 59 percent of those executives responding to a Pitney Bowes Management Survey of 330 large and mid-size Dun & Bradstreet companies said the primary reason they outsourced was to free up their own workers to take care of core competencies. Other companies have said they believe an outsourcer's expertise would provide more comfortable and efficient working conditions for no more cost than attempting it themselves.

The same holds true for transactional outsourcing. At Lucent Technologies, for instance, cycle time (in this case, the time needed to acquire a site, build a facility, and start producing revenue) is more important than project cost, says Anthony Marano, Lucent's real estate VP. "We look for outsourcers who can get us up and running fast once we make a real estate decision. Productivity is much more valuable to us than holding out for better property-purchase terms or trimming construction costs."

So just how does a company judge an outsourcer's value? It may help to know the reasons companies switch outsourcers when they do. That D&B Management Survey revealed that poor service was the No. 1 reason to switch (90 percent), followed by unresponsive management (86 percent), poor employee quality (85 percent), and high overall costs (83 percent). Other than that, it all depends on the objective you've set for the outsourcer: lower costs, faster turnaround, happier employees. Deciding upfront what's expected (and what's not) will help you measure the outsourcer's performance.

Regardless of the type of service your company needs outsourced or the objectives you're seeking, say experts, you should pull the outsourcing firm into the loop as early as possible. "Deals are shifting, becoming much more strategic and less tactical, as buyers and their service providers become more sophisticated," says Frank Casale, executive director of The Outsourcing Institute in New York. "Today, the impact of outsourcing is being felt up the chain to the CEO level and involves things such as program management, relocation, and site selection. The outsourcing firm has become more consultative and advisory."

Arthur J. Mirante, Cushman & Wakefield's president and CEO, agrees. Referring back to the software company his firm helped save $8 million in occupancy costs, he says, "One of the reasons we were able to save so much so quickly is that the company called on us before making any of its own decisions. We were able to bring our expertise into the equation and make recommendations based on that, not just on what the client thought it should do. We would much rather have a client say, 'please help us solve our storage problem' than 'please bring me a file cabinet.'"

RELATED ARTICLE: Intelligent Workplace EVA Matrix

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"When we decided we needed a vehicle that would have value to CEOs who were making building-related decisions," says Vivian Loftness, head of Carnegie-Mellon's architecture department and a senior researcher with the Center for Building Performance and Diagnostics, "we went to the business school and found Jeff Williams, who was writing a book on the 'renewable organization.'" Williams suggested they look at Stern Stewart's popular EVA. Loftness and her team understood it's hard to measure the impact factors such as light, air, and temperature have on, say, productivity. Using EVA as a model, they ascribed values to such cost-benefit areas as organizational churn, waste, and litigation. This has provided a compelling correlation. The tool should be available on an interactive Web site before the millennium.

RELATED ARTICLE: Bottom Line Vocabulary Builder

Adjusted Tax Basis: The original cost of real estate plus any adjustments or capital expenditures for improvement of the property, minus any depreciation taken to date.

Appraisal: Determining the value of any real estate property. Appraisers usually arrive at a figure by using three methods of valuation: The Cost Approach establishes value by emphasizing the property's cost (or replacement value). With the Income Approach, value is established by calculating the income stream generated by the subject asset. With the Market Approach, the appraiser compares the property with other properties recently sold in the area to arrive at an estimate of value.

Compression: Manipulating work spaces to decrease the number of square feet each employee uses. The national average is 100 square feet per employee, down from about 125 just a few years ago. One way to accomplish this is through Alternative Workplaces. Another is, well, pushing in the walls of your employees' offices after they go home.

Real Estate Investment Trust (REIT): A firm that owns and manages a portfolio of real estate properties in order to earn a profit. Many corporations are selling off the real estate they owned for investment purposes and buying into REITs instead. A smart move, says Robert Steers, a principal in Cohen & Steers Capital Management in New York. "Unless you are convinced you can get a substantially higher return off the illiquid asset of private real estate, you should own it publicly, because it is much more risky to own it without liquidity."

Synthetic Leasing: A method of financing real estate or other assets which is treated as an "operating lease" for financial statement reporting and as ownership for tax reporting. It conveys the benefits of interest and depreciation deductions for tax purposes, while keeping asset and associated financial obligations off-balance sheet for GAAP reporting. Companies are using these to preserve capital for core business purposes and to keep from burdening balance sheets with non-earning assets.