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The changing face of corporate real estate.

In May 1993, the Industrial Development Research Foundation published its Phase One report on Corporate Real Estate 2000, a project which is being conducted by a research team at the MIT Center for Real Estate at the Massachusetts Institute of Technology. This article summarizes findings of the study and includes comments from some of the participants.

A sea change in business

Faced with a need to improve productivity and increase global competitiveness, U.S. companies are undergoing a fundamental re-engineering. "They are focusing on their primary businesses and looking for lnnovative ways to enhance shareholder value," says Michael Joroff, CRE 2000 research director.

To have a place in this new business order, corporate real estate must change its focus away from deals toward a concrete contribution to the strategic goals of the business. Corporate real estate executives must think of real estate not as space, but a major resource supporting the productivity and competitive goals of the corporation.

Corporate real estate's response

In order to make this transformation, corporate real estate executives must shift their focus from technical skiffs to strategic ones. Just as personnel managers concerned primarily with recordkeeping were transformed into human resource managers instrumental in planning the organizational structure of the company, real estate professionals must change to meet the challenges of today.

"Think of the corporate real estate function as a bicycle," suggests Arun Daga, general manager of Xerox Services Division. "The back wheel is technical expertise; you need that to go. But without the front wheel of customer knowledge and the handlebars of behavioral and marketing skills that guide the whole machine, you will not be able to navigate."

As outlined by Michael Bell, director of corporate real estate for Dun & Bradstreet, in CRE 2000, corporate real estate executives must adopt new attitudes and assume roles ln fulfilling corporate goals. They must move:

* From a real estate orientation to a business focus. Real estate acquisition and leasing no longer becomes an end, but rather a means for corporations to improve competitiveness.

* From transaction to process. Negotiations can no longer focus on price alone, but must consider productivity and other factors that contribute to corporate performance.

* From control-oriented to service-oriented. Holding down occupancy costs is no longer the only criterion for meeting corporate needs.

* From reactire to proactive. Rather than just responding to management demands, corporate real estate can create innovate ways to use space more effectively.

* From centralized to decentralized. By expanding its interaction, with all parts of the business, corporate real estate becomes more central in business decisions involving workspace needs.

* From in-house expertise to collaboration. Instead of being merely service providers, outside vendors will become partners, sharing in the information and the goals of the corporation.

* From big to small. As corporations downsize to remain competitive, real estate departments will follow suit, making outsourcing more of a necessity than ever before.

* From real estate skills to general management capability An understanding of corporate finance, quality processes, team building, and information management must be added to real estate knowledge.

Making the transformation

One would hardly expect that such a significant transformation can be achieved easily. In fact, Bruce Russell, director and vice president of corporate real estate for Eastman Kodak Co., believes that it is difficult for those whose backgrounds are limited to real estate or facilities backgrounds to drive the strategic process.

"That is why more heads of corporate real estate departments today come from general business backgrounds instead of from real estate," notes Russell.

CRE 2000 outlines five stages in the growth of a corporate real estate department--taskmaster, controller, dealmaker, intrapreneur. and business strategist. The skills required in the least advanced levels are also necessary in the highest one, but each step up represents a closer alliance to overall corporate goals.

The astute real estate manager uses all of these skills, choosing the response based on the situation and the needs of the corporate customer. According to CRE 2000:

* A taskmaster "supplies the corporation's need for physical space, as requested."

* A controller "satisfies senior management's need to better understand and minimize real estate costs."

* A dealmaker "solves real estate problems in ways that create financial value for the business units."

* An intrapreneur "operates like an internal real estate company, proposing real estate alternatives to the business units that match those of the flrm's competitors."

* A business strategist "anticipates business trends; monitors and measures their impacts; contributes to the value of the corporation as a whole by

focusing on the company's mission, rather than focusing only on real estate."

Assessing a corporation's level

Understanding where a corporation and its real estate department fit into this hierarchy is also important for those providing services to the corporation. The vendor must gear the service to the appropriate level of corporate development.

"The best way to determine what growth level a corporation has reached is to listen to the way in which they define their problems," advises Joroff. "If they are talking about reducing occupancy costs, they are acting like controllers. If they are interested in partnering with business units, they are probably business strategists."

Joroff adds, however, that if a corporation is not ready for strategic growth, neither the corporate real estate department nor the supplier will be able to effect a change.

"If a corporation is thinking about change, corporate real estate can help lead the way," he says. "But if they are stuck in doing business the old way, the corporate real estate executive may not be allowed to provide full value."

If a corporate real estate department has reached the intrapreneurial or business strategy stage, they will probably be looking for service providers whose skills and approach go beyond traditional supplier roles. Corporations demand "seamless service," which merges outside services in the same formats as in-house work.

In turn, suppliers must gain a better understanding of corporate needs and tailor their services to specific corporate needs. In addition, providers must learn to communicate with corporations in business terms.

To ensure the type of services they now re quire, many corporations are forming strategic alliances--long-term agreements with a select number of suppliers who are privy to extensive information about the company and who share risks and rewards that grow out of the alliance.

For example, Russell currently only uses four companies for Kodak's real estate assignments worldwide. Each company is assigned a specific niche so that there is no atmosphere of competition.

"Once a year we meet with all four firms together and explain corporate goals for the year" notes Russell. "Then we ask all the firms to work together and with us to come up with the best ways to meet those goals. It is a whole different mind set."

Russell also notes that some of Kodak's alliance partners are forming alliances in order to offer a full spectrum of services worldwide.

In addition to alliances, CRE 2000 ratalogs several other relationships that are defining the new interaction between corporate real estate and suppliers:

* Provider contracts. These contracts are often written in broad terms that allow for flexibility and customization of services.

* Service provider retainers. These providers often have long-term relationships and are privy to sensitive information. According to CRE 2000, they "act as an extension of the core staff to accomplish particular projects..."

* Joint ventures. Long used in development and acquisition, long-term joint ventures have now been entered into with service providers.

* Spinoff providers. As corporations divest themselves of secondary divisions, these groups often become independent firms and form alliances with their former parents.

Overcome pitfalls

Although strategic alliances appear to reflect the new corporation outlook, service providers are often frustrated when they try to achieve such partnerships. Because the real estate industry is now focused more on managing existing stock instead of development, real estate departments operate more like service providers than product producers. Thus, it is often difficult to determine what services a corporation wants from a service provider.

Pricing services under the terms of partnership agreements is also difficult. As CRE 2000 notes, corporations often ask for additional strategic services without offering additional compensation.

Selling the sizzle

Perhaps the biggest obstacle facing corporate real estate executives today is their inability to convince senior corporate management that real estate can make a significant contribution to the corporation.

"The real estate community has to both establish an image of value added and deliver it," says Daga. "Senior management will listen and involve you only if they feel you can bring value." In part, educating top management about real estate's potential is the goal of CRE 2000. "We also hope to develop a constituency in the profession moving toward change," confirms Joroff.

Once the direction of change is established, Phase II research and development will focus on developing analytical and diagnostic tools so that corporate real estate managers can improve space use and financial performance. Although some of these changes may come slowly, they reflect a basic structural change in the operation of U.S. business and therefore in the expectations for real estate. The difficulty, of course, is determining how to meet the demands of this new business environment. "Companies that understand these changes could do very well," notes Daga. "But each company's workplace and financial strategy and workplace needs is different. The formula is that there is no formula."
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Title Annotation:Asset Management
Publication:Journal of Property Management
Date:Sep 1, 1993
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