Ron Zappile
While navigating the current dynamic and unpredictable business landscape, cost saving remains a top priority for many organizations. Corporate real estate plays a crucial role here. Yet, according to Deloitte, almost 50% of companies fail to meet their cost reduction targets. Even for those that meet the targets, Gartner suggests that aggressive cost reduction could jeopardize an organization’s high-impact innovative projects that bring in new opportunities.
To approach cost saving in a programmatic way that ensures innovation and operational efficiency, four key domains that create value should be explored:
A Programmatic Approach to Savings
Strategic Alignment with CFO
Understanding the CFO’s strategy on real estate and capital is essential for generating cost savings. Is the organization balance sheet-driven, or income statement-driven? By aligning real estate decisions with the organization’s overall financial philosophy, opportunities for cost reduction can be identified. Corporate capital options for owning versus leasing should be aligned to each location’s expected length of requirement. With respect to landlords, utilizing relationships with large landlords and analyzing their debt positions and credit ratings provides insights into potential negotiation leverage.
Portfolio Management
Strategic portfolio management is crucial for driving cost savings. This involves considering consolidation opportunities—reimagining campuses or adopting hub models that can lead to cost efficiencies. With the rise of hybrid work models, analyzing occupancy and optimizing space utilization, as well as taking advantage of long-term labor-cost arbitrage opportunities and government incentives, become key in reducing real estate costs.
Maximizing Negotiation Leverage
When entering real estate transactions, it is essential to maximize your negotiating leverage. Organizations can capitalize on favorable conditions by understanding market cycles and timing. Rent arbitrage by locating in smaller markets can yield significant savings, and implementing a sublease program eliminates excess space. Tightly managing transactions and project fees, while considering short-term and flexible options, helps minimize costs.
Optimizing Day-to-Day Operations
Efficient operations play a vital role in cost savings. Conducting lease and operating expense audits ensures accurate financial management and holds landlords accountable. Lease accounting analyses aligned with the CFO’s philosophy help identify potential cost optimizations. A robust customer relationship management (CRM) framework streamlines business units’ requirements and speeds implementation. Leveraging technology and tools enables opportunity identification and expedites decision making. Finally, exploring outsourcing options for certain functions (within existing facilities) can result in operational cost savings.
Potential Savings of 20-30% Over Five Years
Taking a holistic approach to aligning real estate strategies to overall business objectives can uncover significant cost-saving opportunities and lead to substantial financial benefits for organizations.
Bret Swango, CFA
Stephanie Rodriguez
Baily Datres