Corporate real estate's bottom line.

How to manage corporate real estate assets more effectively represents a challenge in every industry. To provide new information and insights about these questions, Arthur Andersen & Co. during the past year conducted an in-depth study sponsored by the International Association of Corporate Real Estate Executives (NACORE) and the Commercial Investment Real Estate Institute. The result is a special report -- Real Estate in the Corporation: The Bottom Line from Senior Management.

Corporate real estate (CRE) represents an investment of staggering size in the physical infrastructure of North American corporations, averaging fully one-quarter of total assets.

And few would disagree that management of these fixed assets has substantial impact. Yet the Arthur Andersen study titled "Real Estate in the Corporation: The Bottom Line from Senior Management" reveals marked differences in how senior management and their corporate real estate executives perceive the current and future role of the corporate real estate function.

Most striking is that senior management and corporate real estate executives appear to have widely varying views about what the CRE function should be doing and its capacity to influence the bottom line.

Senior management responded to questions on a broad range of issues confronting corporations during a period of significant change. Simultaneously, the study surveyed senior CRE executives who have a day-to-day role in how real estate assets are managed. Their views not only provide information about current activities and objectives, but perceptions of their departments' strengths and weaknesses.

Taken as a whole, the study suggests a wide horizon of opportunities for many corporations to benefit from managing real estate as a financial asset. And it points to the need for a continuing evolution of the CRE function within the corporate structure. The following summarizes highlights of responses from senior management and CRE executives.

COSTS AND QUALITY

Senior executives offered decisive views of what they believe are the most formidable challenges facing their companies -- today and in the future. Overall, the study confirms that this is a period of fundamental questioning of business practices for North American companies.

Improved business performance is the focus. And this study reveals what senior management believes is most important to achieving that goal. Customer service leads all corporate functions in perceived importance to success -- with marketing and sales, and finance following. Industries, as expected, varied. High technology management, for example, placed greater weight on new product and service development. But regardless of industry, senior management put the greatest emphasis on customer service.

Significantly, corporate real estate was ranked last in importance among eight corporate functions by senior management in all industry groups, although retail gave the CRE function considerably more weight than other sectors. It seems apparent that most senior managers view corporate real estate as an "enabling function" -- a cost of doing business -- rather than a more direct factor in corporate performance. This was further substantiated when senior management was asked about the impact of CRE activities on competitive advantage. Nearly two thirds of these corporate leaders indicated that real estate has only a minimal or no effect on how effectively a corporation competes in the marketplace -- despite its impact on capital allocation. Most CRE executives, however, disagreed. The majority (nearly 80 percent) believe corporate real estate can play an important role in maintaining or improving competitive advantage. This divergence in views is striking, and further insights may be gleaned from study findings that rank the importance of various CRE activities. Senior management and CRE executives are of one mind that meeting the needs of operating units is the most important CRE activity to corporate success and profitability. But in other key areas, perceptions differ markedly. Senior managers generally do not view linking real estate strategy to business strategy as important, and real estate strategic planning and analysis receives even less weight. For CRE executives, these two categories rank high. Overall, it appears that senior managers perceive real estate activities to be action driven, rather than strategic. Many CRE organizations will need to respond by being much more proactive in developing services and solutions to serve the needs of business units. Significantly, senior managers who are well counseled about the strategic importance of real estate as a financial asset gave it much more weight in relation to improving corporate performance. The pivotal issue appears to be knowledge.

CRE's CONTRIBUTIONS

Senior management and CRE executives also have distinctively different views on the most important contributions that corporate real estate makes to the company. Corporate leaders view providing an efficient work environment as the CRE function's single most important contribution, followed closely by cost reduction and providing flexibility for growth and contraction. In contrast, CRE executives ranked providing an efficient work environment in last place. And they placed a much higher emphasis on increasing profits and enhancing value to shareholders. Clearly, CRE groups will experience continuing pressure pollution to reduce costs -- providing more services with fewer resources -- as companies push for greater profitability and market share. And these concerns will generate a continued focus on efficient and innovative work environments, which offer flexibility at reduced cost.

The emphasis on quality -- one of senior management's primary concerns -- suggests that quality applications such as Total Quality Management can be a significant tool for CRE groups meeting these challenges. These quality disciplines represent a leap forward over traditional "quality assurance" programs. Quality programs can greatly influence the way companies manage the real estate portfolio to meet corporate goals of productivity, competitive advantage and shareholder wealth. And it provide a way to manage change and generate continuous improvement as a CRE department evaluates its service base and various customer groups in support of the corporation's primary business.

FINANCING DECISIONS 

Corporations respond to a variety of issues in raising capital based on the value of real estate assets and funding new projects. Interviews of senior managers and CRE executives indicate that companies have only limited demand for outside capital, despite apparent opportunities to finance CRE assets.

This is consistent with prevailing views that real estate ownership may not be the best use of capital, particularly in a time of rapidly changing business practices, markets and space needs. These considerations have broad implications for CRE decisions on issues ranging from facility locations, strategies involved with owning or leasing, and planning for future needs.

One of the study's most startling findings was the relationship between the quality and consistency of real estate reporting, and management's understanding and knowledge of CRE as a function. More than 80 percent of senior managers surveyed use real estate information in making business decisions -- but only if they receive regular reports on these assets. More than half of the CRE executives indicated they do not provide regular reports on real estate performance to management.

It appears that when information about real estate is communicated effectively, senior management tends to use it in business decisions and recognize corporate real estate for its ability to affect a company's competitive advantage. Also at issue is how real estate performance is measured and reported. Senior managers indicated that cost per square foot is the primary measure used to monitor real estate activity. But what they find most meaningful is business return on assets as an indicator of corporate performance. The focus for executives outside the CRE group is how real estate translates into the cost of doing business. That means CRE organizations may benefit greatly by using performance measurements aligned to core businesses.

CHANGES AHEAD

The study also provides a broad portrait of how CRE executives view their most important challenges, trends shaping the CRE function and changes they foresee in the future. Significantly, focus on quality and customer service was one of the lowest ranked trends by CRE executive, indicating another divergence in views with senior management's.

Some CRE executives may fail to see the links between how real estate is managed and how it may assist business units in improving customer service and quality. It is also apparent that many CRE executives are concerned that their departments are functioning in isolation from the main business of their companies. Non-involvement in strategic planning, access to senior executives and senior management's lack of understanding of real estate are viewed as significant impediments.

To add value, however, real estate strategic planning -- including CRE strategies, core competencies, services and decision-making -- must be aligned to business unit needs. New skills and experience will be a key to this process. CRE executives view a skills and experience gap as the most significant challenge to improving departmental performance.

BEST PRACTICES

CRE executives also indicated that centralizing corporate real estate operations or costs -- followed by developing strategic space plans -- have been the leading activities recently implemented. But benchmarking and the search for "best practices" represent the top planned activity for the future. Many CRE executives are taking strong initiatives to acquire comparable data to identify ways to add the greatest possible value to business units. Most CRE executives indicated they do not expect their departments to shrink in size during the next year, despite corporate initiatives to downsize and decentralize. Interviews with senior managers and CRE executives, however, suggested a much different scenario, with substantial pressure reported to reduce staffs. The study overall suggests that CRE departments of the future will be leaner organizations, staffed with professionals having strong financial, managerial and communications skills. This differs from the more traditional CRE structures that have emphasized a skills mix primarily oriented to technical real estate expertise.

The service base of successful CRE organizations is likely to evolve around re-directed core competencies, the ability to bring new solutions, and an effort to integrate multi-technical and business issues in decision-making. Regardless of the industry, CRE organizations are challenged to rethink their roles within corporations.

HOW THE ANDERSEN STUDY WAS CONDUCTED

Arthur Andersen & Co.'s study of real estate in the corporation offers a broad assessment of current and future management attitudes and practices among companies, and the implications they have for the professionals who manage the corporate real estate process. More than 700 executives selected from major U.S. and Canadian corporations responded to the survey. Approximately 43 percent of these executives hold positions of chairman, CEO, president or COO, while an additional 32 percent serve as CFO. Close to 150 corporate real estate executives responded to a more detailed written survey.

Dun and Bradstreet corporate listings were sampled randomly to reflect the approximate industry make-up of the U.S. economy based on GNP statistics. Those companies surveyed listed 500 or more employees, and had estimated sales of $100 million or more annually. In the case of educational organizations, an equivalent sales value was calculated based on employee size. The study results include data broken down by industry to show variances. It is intended to inspire a continuing dialogue on these important issues, rather than furnish final or definitive answers to problems confronting corporations and their real estate organizations.

Andy Kane is Western Regional Director of the Real Estate Services Group at Arthur Andersen & Co.