Managing Real Estate to Build Value

Real estate escapes the thoughtful attention of most senior managers. It often falls within the realm of their responsibilities—and, of course, they use it in their daily operations—but many do not appreciate its potential impact on company performance. So they delegate real estate to specialists, who operate on a deal-by-deal basis and consider their decisions as administrative and technical tasks. Recently, however, some companies have recognized that by managing real estate as a business function, they can cut costs significantly and, at the same time, increase productivity.

IBM, for example, has saved $1.4 billion by linking real estate utilization to business unit performance in a relentless attack on excess space. AT&T has exceeded its goal of a $500 million cost reduction by making senior executives directly responsible for real estate issues and by linking decisions about facilities to business strategy. Chemical Bank has reversed long-term increases in occupancy costs through constant attention to its occupancy-to-operating-income ratio. Dun & Bradstreet has trimmed $51 million from annual occupancy costs by identifying synergies between real estate and a wide range of internal technologies and support services. And Sun Microsystems is using real estate as a tool to help it achieve strategic goals; sustaining the organization’s rapid growth depends in part on its skill in expanding capacity.

Those companies and others are managing real estate with a dual purpose. To reduce costs, they pursue the “three Ls” of corporate real estate: consolidating locations, simplifying layouts, and renegotiating leases. (See “Uncovering Your Hidden Occupancy Costs,” HBR May–June 1993.) But they also are using real estate as a lever to improve their competitive position. As Robert E. Weissman, chairman and CEO of Dun & Bradstreet, explains, “In the past, our real estate was configured to support a series of ‘silo businesses’—not corporate goals. It also impeded our ability to communicate across businesses. Those internal factors, combined with D&B’s status as a large, complex public company, gave us an overhead burden that some of our single-focus competitors don’t have—a serious competitive disadvantage. We were diverting dollars from customer value to real estate expense. Now we’re removing the source of those costs and using our real estate portfolio to push speed-to-market and competitiveness.”

Some companies use real estate as a lever to improve their competitive position.

A rigorous approach to real estate management is essential for three reasons. First, real estate is complex: the variety of choices, the specialists’ jargon, and the fragmentation of related tasks spread throughout an organization can confuse decision makers and obscure the issues. Second, real estate is often counterintuitive: leasing “retail” space on a “prime” site may seem the obvious move until one finds that “office” or even “industrial” space on a “secondary” site will do just as well at half the cost. Third, real estate is emotional: discussions among coworkers—even senior managers—about site relocation, office furniture, and similar issues can become heated and parochial.

But shifting to an analytical approach is not easy. What’s needed is a process that managers can use to diagnose whether real estate is a competitive problem in their organizations as well as a set of tools to facilitate their leadership role in real estate decisions. Based on Apgar & Company’s experience with Dun & Bradstreet and other like-minded companies, my colleagues and I have developed a scorecard that managers can use to evaluate their current real estate situation, a framework within which to consider real estate decisions in a long-range companywide context, and models to help them visualize how facilities might affect their business strategies.

Mục Lục

Evaluating Your Current Situation

To paraphrase Lewis Carroll, before you can decide what you want and where you’re going, you have to know what you have and where you are. The following five factors provide a snapshot of a company’s real estate situation; analyzing them will give general managers a clear sense of problems and opportunities.

Amount:

Can we reduce the amount of space we’re using?

Price:

Can we reduce the price we’re paying for space?

Grade:

Can we do business as effectively in a different type and class of facility?

Area:

Can we do business in another submarket in the region?

Risk:

Can we reduce the environmental and financial risks of occupying this real estate?

A simple evaluation—essentially, a corporate real estate scorecard—provides a useful way to begin to answer the questions. Its purpose is twofold: first, to identify how important the five factors are to the company and to the facilities in question; and second, to compare the performance of each facility to that of similar facilities in the company and in other organizations. The scorecard gives managers a quick means of judging their real estate’s effectiveness as a company resource and as a competitive lever.

The evaluation is based on a 10-point scale. The first step is to assign each factor a weight based on how important that factor is to the company. For example, if each factor is equally important, each receives a weight of 2. (Five factors × 2 = 10 points.) If certain factors are more important than others, their weight is adjusted accordingly. Thus managers of a large administrative center might assign price and amount each a weight of 4, reflecting the importance of acquiring low-cost space and utilizing it as efficiently as possible. The other factors might be given a weight of 1 or even 0. By contrast, high-margin retailers, for whom the qualities of a particular building and neighborhood are all-important, might assign a weight of 3 to grade and a weight of 4 to area. Each factor can be given any weight, as long as the total weight of all the factors equals 10.

Once the weights have been determined, the next step is to give the facility a score for each of the five factors. The highest score each factor can receive is equivalent to its weight. The score signals problems and opportunities by comparing the facility with similar facilities and with uses of space both in the company and in the industry as a whole. For example, consider the same administrative center for which amount is very important. Having assigned a weight of 4 to that factor, managers now compare this facility with others and discover that it has only half the space utilization (that is, double the number of square feet per person) of its competition. So, of a possible 4, its score for the amount factor is only 2. High and low may be used for scores instead of numbers; however, finer measures will provide more exact results. To identify suitable candidates for comparison, managers can use the Standard Industrial Classification (SIC) system, originated by the federal government. But it is not necessary to limit the comparison to one kind of business; managers also may gain insights from studying how other industries use real estate.

Take the case of a 200,000-square-foot administrative center with 800 employees. (See the table “Real Estate Scorecard.”) The amount and price factors are the most important, so each has been given a weight of 4. But the center’s performance on these two factors does not compare favorably with that of other, similar facilities. Of a possible 4, each factor has scored a 2. Grade is an insignificant factor because the facility is a back office, not a retailing property. Area scored high because the location is accessible to employees yet does not have to attract customers. Risk received a high score because the facility has no environmental problems and because its debt-to-equity ratio is below average for both the company and the industry. The facility’s total score—the sum of all the scores for all five factors—is 6 out of the possible 10. Managers now know that the facility has considerable room for improvement, and they have a clear picture of where to focus: The company should be able to improve space utilization and reduce rent. Equally important, managers also know that they need not concentrate their efforts on the other three factors.

Real Estate Scorecard

A Framework for Considering Real Estate Decisions

Completing the scorecard evaluation will help managers gain a better understanding of their company’s immediate real estate priorities. But to assess long-term needs effectively, they also must examine how decisions about their facilities can help or hinder the way customers are served and employees do their work. And they must determine how new directions in competitive strategy and organization could in turn affect long-term real estate decisions. To accomplish those goals, it is useful to think about real estate within the context of a broad framework encompassing functions, time, and space (F/T/S).

How do new directions in strategy affect long-term real estate decisions?

Consider the reengineering efforts of one large service company. Managers envisioned a network of regional centers to provide telephone-based customer service and internal staff support. At first, the company followed an expedient approach, selecting locations for its centers based on a traditional analysis of labor market conditions and cost. Real estate professionals were then called in to find the needed space. Before the deals were made, however, the company realized that the planned transactions would have locked in excessive costs for space and facilities. The managers had not considered the real estate decisions in tandem with basic business issues: Which functions add customer value and strengthen competitive advantage? When should they be performed for maximum convenience to customers? Where can they be performed at low cost with high productivity levels?

When the managers reconsidered their regional configuration in light of those issues, they were able to reduce the number, size, and costs of the centers as well as to better match their decisions about locations, layouts, and leases—the three Ls—to their company’s capabilities and plans. For example, the managers began using the same space for different functions in multiple shifts, thereby eliminating half of the square footage required by selected users. The framework helped the organization assess its real estate needs more effectively by enabling managers to think about real estate use in the context of established business practices and, at the same time, by fostering creative thinking about how changes in those practices might affect the need for facilities in the future.

Faced with any real estate decision, managers should first consider functions. What work needs to be accomplished? Functions are the main source of change in most real estate portfolios. Because they define the need for staff and equipment, they determine a facility’s type and size. A company may automate transactions to speed customer service and upgrade information technology to personalize it. Employees may be cross-trained to leverage skills across functions. Noncore functions with limited strategic value may be outsourced. Any of those changes in how a company does its work will affect its real estate decisions.

Time is the second element in the framework. When is the facility in use? Are there periods when it is underutilized? Pushed past its effective capacity? This element reveals how business operations and uses of space are related to facility capacity. Part-time employees who share desks increase the availability of individual work spaces. Early and late shifts increase a facility’s capacity. Global companies can take advantage of multiple time zones to consolidate certain service operations.

Space rounds out the picture. It embraces all of a company’s physical resources: the structures that house employees, contractors, and others; the furniture, fixtures, and equipment within those structures; and the layouts that organize the space into individual and group work areas, support facilities, and the like. Effective real estate utilization depends on how closely decisions on space are integrated with the functions that it supports, the time when it is used, and its three Ls.

Managers can use the F/T/S framework at two levels: portfolio and region. The companywide portfolio level is the managers’ canvas on which to sketch bold scenarios and actions that might hold potential for improved performance. Should we consolidate U.S.-based functions and facilities in Europe? Should we establish sales offices in Frankfurt but move administrative offices to Fargo? Should we purchase certain strategic operations sites but lease field offices? Should we eliminate certain functions in one facility by rearranging work shifts in others?

Isolated, the typical facility lacks sufficient scale and scope to improve corporate performance significantly. But a portfolio can have dozens, even hundreds, of locations, layouts, and leases. Managers may discover ways to reach out to more customers or to preempt competitors by comparing several sites and even entire networks. By analyzing multiple configurations, they may learn how to increase output and improve communications. By reengineering lease and ownership structures, they may increase financial flexibility and reduce corporate liabilities. By consistently relating space to its business use in functions and time, managers can own the decision-making process and guide the specialists more effectively.

By comparing several sites, managers may find ways to reach out to customers or to preempt competitors.

Regional planning supplies the link between portfolio analysis and local action. A major bank in a metropolitan area provides a good example. Before using the F/T/S framework, the organization had already cut occupancy costs by 15% in two years. Now, using the framework to gain a better understanding of how real estate affects its day-to-day operations, the bank’s managers are considering a major overhaul of its retail portfolio. The objective is to reduce costs even further while maintaining a competitive franchise of neighborhood branches and personal services.

The key to this initiative would be increasing the availability of bank experts by coupling technology-based functions with low-cost space. Half of the costly full-service branch facilities would be closed. The remainder—open 12 hours daily—would be enhanced with employees specially trained to provide a larger range of routine services in the branch; what’s more, customers would have access to experts at the central office—through teleconferencing—for specialized advice. Simultaneously, the number of automated-teller sites would be increased fivefold and their electronic transaction services would be expanded. In addition, a new network of minibranches would be established to offer limited services in neighborhood supermarkets in order to produce higher operating income per employee with only one-fourth of the usual deposit base. The expected results over three years are occupancy savings of 25%, even with restructuring charges, and a 10% growth in revenue.

The Essential Data

Once managers have assessed their company’s situation and adopted a more robust framework for considering real estate decisions, the next step is to assemble the data they need for detailed analysis. Because most companies manage facilities as separate cost and activity centers, not as an integrated portfolio, the data about them are widely dispersed. Moreover, those data alone (rent, size, utility expenses, and the like) do not reveal whether real estate even belongs on senior managers’ agendas. Some managers have easy access to such figures, but surprisingly few know how to use them in evaluating basic decisions, such as determining the size and term of lease commitments (which may limit the company’s flexibility) and in finding ways to increase utilization (which supports efficiency and effectiveness). Even fewer have the information available to suggest options for aligning their real estate resources with competitive strategies and to measure how real estate, productivity, and shareholder value are interrelated.

For example, consider managers who are trying to move a company’s operations to a certain location. Real estate brokers might recommend renting space at $20 per square foot based on the market, and architects might recommend allowing 250 square feet per person based on standard practice. But if the managers learn that employees could do their work in 10% cheaper space or in 10% less space, following those recommendations is no bargain. And if the company’s cost/income ratio is significantly higher than its competitors’, such a “deal” literally throws shareholders’ money away.

The administrative center evaluated earlier provides another good example. Reducing space costing $20 per square foot by 10% in the 200,000-square-foot facility would save the company $400,000 annually. Reducing the $20 rent by 10%—following the space reduction—would save $360,000 annually. If both actions are taken, the combined discounted savings are worth $4.7 million over the life of the lease (in this case, five years). At the company’s price/earnings ratio of 15, the savings would generate more than $11 million in additional value for shareholders.

The challenge, then, is ensuring that senior managers have essential information in the correct context. This can be accomplished in part by creating a specialized database. To begin, real estate data first must be organized across the company’s entire portfolio for analytical use. This exercise alone may take several months because the data—drawn from many sources—have to be normalized. (Synonyms, abbreviations, and the like must be identified and coordinated for computer analysis.) The data must include details on all locations, facility types (headquarters, branch offices, data centers), and financial commitments (ownership, rental, sale-and-leaseback). They must include business information, such as revenues, expenses, and staffing data. The database should cover information such as addresses and business-unit identification codes; it also should cover cost and usage by business function to permit comparisons across units. Further, the database should be “fully loaded”—that is, it should include facts and figures on all ancillary facilities and services, such as cafeterias and mail rooms.

A sample database design for a corporate portfolio might use five modules. (See the chart “A Real Estate Database Organizes Essential Information.”) Business data provide the corporate context for the real estate measures. The figures are needed on a companywide and facility-specific basis. Staffing data define the demand on facilities by measuring such factors as the number of desks required. Staffing data should also track occupants’ roles (because not all roles require space) and working hours (because time also determines the demand for space). Facilities data quantify physical capacity. Occupancy cost data include not only standard factors such as rent, utilities, maintenance, and taxes but also such elements as parking, security staff, and depreciation. Market data reveal the external supply-and-demand conditions, such as current prices and vacancy rates, that affect whether a company is able to relocate employees, negotiate buyouts, or dispose of property in a timely, sensible manner.

A Real Estate Database Organizes Essential Information

In such a database, physical and financial data define the “supply” side of real estate decisions—that is, the amount and cost of the space available. Functions and staffing quantify the “demand” side—that is, what physical capacity is needed.

Once the data are assembled, there are three types of measures that managers can use to inform and support their decisions. First, financial measures link real estate to revenues, expenses, asset values, and market values. Most managers naturally focus on financial measures because of the impact they have on investors’ views of the company. Second, customer measures relate real estate to productivity: sales and production units per square foot and occupancy cost per unit. In some businesses, such as restaurants and theaters, real estate is an integral part of the product/service mix. But in most industries, facilities do not add value directly to products and services. Raising the productivity of real estate and lowering its cost on this measure thus require initiatives such as repositioning sales centers closer to customers or shedding high-image headquarters in favor of more functional facilities. Finally, operational measures reveal excess capacity and show where real estate performance can be improved. These measures include square footage per person and per desk, number of shifts or hours of operation, number of locations, square footage per location, and lease expiration dates by location.

Managers now realize that they have more to gain by eliminating space than by negotiating rent.

Overlooked in many companies, financial, customer, and operational measures have been the hidden key to IBM’s success in achieving lasting reductions in occupancy costs. As Lee A. Dayton, IBM’s general manager for real estate and business development, explains, “If you drive down the square feet per person, everything else follows. Many costly support facilities and services disappear when you reduce space consumption. Our managers now monitor space utilization as seriously as they do sales expense.” IBM has come to view its real estate costs as discretionary instead of as fixed. And company managers now realize that they potentially have more to gain by eliminating space than by negotiating rent.

New Models for Real Estate Planning

Some real estate questions, such as “Can we lease the tenth floor for $20 per square foot?” are straightforward. But others are far more complex. The question “Should we consolidate two facilities?” for example, requires a consideration of how functions that are located in those facilities, and perhaps elsewhere, could be combined; how market forces could require different operations in the future; how reengineering could change location and layout requirements; and whether existing lease commitments could be adapted to such changes.

Computer models are essential for helping managers visualize links between their company’s current situation and the future. These models are algorithms, supported by a comprehensive database, that allow managers to analyze what effect any given change will have on future space needs and costs. They enable managers to break through conventional thinking such as “We have to be in Class A ground-floor space” or “Vice presidents need corner offices.” These models also encourage managers to base cost and space standards on solid business analysis instead of on standard practice. As Dayton says, “Using industry benchmarks wasn’t helping us reduce costs; we had to measure space consumption against managers’ bottom lines. We’re breaking the belief that offices are entitlements.”

Models for analyzing real estate are not new. But they generally are designed for investors and structured around leases. They measure potential returns from property yields and values. Moreover, they are based on the premise that occupants’ needs are determined by the terms of the lease.

Business real estate models, on the other hand, are designed for managers and created to address such issues as whether the company should relocate and how it can increase productivity. These models capture the total costs and benefits to the company from real estate’s contributions to productivity, profits, and shareholder value. Three types of models in particular—staff, space, and scenario—are very useful because they show how various business scenarios affect staff demand and space supply.

Staff Models.

By mapping a given facility’s functions, employees, and shift schedules, a staff model determines that facility’s maximum employee load. It also can reveal how that load can be adjusted and how the facility can be used more efficiently. Managers may find, for example, that increasing the load does not require reconfiguring space or relocating. This distinction becomes clear if we consider the administrative center evaluated earlier. (See the table “Don’t Use More Space Than You Need.”) Although 800 people occupy the space, they need only 290 desks; therefore, space for 510 desks is excess, and in this case that space is worth $38 million in shareholder value. That value can be captured by disposing of the space or using it more efficiently.

Don’t Use More Space Than You Need

Space Models.

These models help managers figure out how much space the company will need to meet the staff model’s projected demand. They also reveal the most efficient way to use available space. By doing a zero-base comparison of competitive need and physical capacity for each use of space, managers can identify excesses and shortfalls that cannot be detected by “walking around” or by design analysis.

A space model begins with a space audit to identify each use of space within a facility. Because it rigorously details the inventory, this step often uncovers excess space. Each major use of space has many subsets: circulation (corridors, aisles), core (lobbies, elevators), individual (offices, furnishings), support (meeting rooms, closets), and equipment (computers, copiers). Circulation and core space are fixed elements defined by building structures; the other uses derive directly from the staff model’s projections.

Scenario Models.

With outputs from the staff and space models, managers can create a scenario model to evaluate real estate options for prospective business strategies. The more complicated the scenarios, the greater the need for a model to illuminate the relationships between staffing and space. For example, a company that wanted to make its customer service department more convenient for clients might compare how it currently operates with how it might operate if employees had the option of working different shifts or working part-time at home. Using this model, managers would test various alternatives, comparing the net present value of costs (such as relocation and buyout expenses, attrition and new hires, and additional communications) and benefits (such as increased productivity, less costly and better utilized space, and lower operating expenses).

Scenarios use facts to help managers speculate about future events. They encourage imagination about space and cost trade-offs. For example, transforming industrial space into retail space and merging ten locations into two are not instinctive actions to either managers or real estate specialists. Indeed, both may oppose them because they seem too radical. Ideas emerge as serious possibilities only when one visualizes the many variables that constitute a real estate initiative. Scenario models make that process more efficient and can forestall long-term commitments to facilities that will quickly outlive their usefulness.

Because the least obvious choices often yield the best results, managers should apply models to the broadest possible range of staff and space uses in the business. There is little expense or risk in such comprehensive modeling, and the rewards can be substantial.

Dun & Bradstreet’s Real Estate Initiative

Dun & Bradstreet provides a good example of how a large, traditional company can change its approach to real estate with significant results. In 1993, the company’s real estate portfolio included nearly 1,100 facilities in 60 countries, costing $309 million per year, occupying 13 million square feet, and housing 45,000 employees. CEO Robert Weissman realized that the portfolio was the result of the company’s history of acquisitions and its decentralized business structure. He also suspected that D&B could achieve substantial savings by realigning its real estate holdings as part of a larger effort to strengthen its competitive position.

First, Weissman put together a team of operating managers, staff, and consultants to launch a five-year real estate initiative. By analyzing location, layout, and leasing options and by applying the F/T/S framework, D&B was able to illuminate how real estate supported various facets of the business (such as organization, productivity, customer service, and communications). Weissman’s suspicions were confirmed when he found that real estate was a heavy cost burden that also impeded communications within the company and hindered responsiveness to customers’ needs.

Further analysis using the F/T/S framework revealed that the culprit was the company’s basic business structure, which had shaped the way real estate was managed. Historically, each division within D&B made its own real estate decisions, even if different business units were located in the same town or in the same building. Each unit controlled its own mix of closed offices and open space. Further, D&B was a victim of the “edifice complex”: Many of the company’s buildings and offices were larger and more elaborate than necessary, even though few customers ever saw them. Most business with clients is conducted at the client’s location. The company’s heavy investment in facilities thus had little competitive value.

In response to its findings, D&B decided to embark on five interrelated programs: consolidation, colocation, renegotiation, disposition, and “virtual officing.” The goal was to drive costs down by eliminating excess space and to sustain lower costs by reducing space consumption. Specifically, D&B set out to reduce annual occupancy costs by 25%, to drive space usage down by 30%, and to reduce its occupancy-cost-to-revenue ratio from 7% to 4%. The team focused on regional plans in selected cities with multiple sites. D&B also decided to begin the initiative in North America, where short-term savings could more readily be achieved, and then roll out the strategy globally over .time..

In 1993, Dun & Bradstreet launched a major initiative using real estate as a lever to improve the company’s competitive position. Chairman and CEO Robert E. Weissman describes D&B’s new approach and its impact on how the company operates.

On Diagnostic Analysis. I review the company’s performance based on progress in the marketplace and progress toward improving productivity. Real estate is either a facilitator or an inhibitor of those processes. The real estate evaluation we conducted in 1993 documented costs and compared the performance of our facilities with that of our competitors’. The results confirmed my suspicion that we were spending too much on real estate. They also revealed our best opportunities: numerous leases coming due that we could renegotiate or buy out, obsolete assets that we could sell, and underused space that we could reconfigure for greater efficiency. We didn’t want to miss any of those possibilities, but we had to set achievable goals to focus our efforts in such a large portfolio.

The evaluation also made me aware of the wide variance in actual space usage and the links between staffing and space. One unit averaged 90 square feet per person and another 310 in the same facility! Of course, the manager of the second tried to justify 310 as a minimum. We were able to use such examples to show people how more effective standards could be applied.

We also used the evaluation to break through the natural reluctance in organizations to change the physical environment. People are not very rational about real estate. They spend most of their time in it, yet they don’t think objectively about it. But although real estate is an emotional issue, it’s also complex enough that analyzing it can make a difference in how managers deal with it. You have to analyze all the factors that directly affect people and how they work. Doing so allows you to build an objective, convincing case for relocation and other changes. You have to show how the savings are going to improve revenues and profits. And you have to demonstrate how each unit will benefit. You have more power with good information because people blow anecdotal information away.

However, it’s essential to understand that although analytics are important, they’re not sufficient. Ultimately, senior executives have to commit. I met with our financial managers from around the world, presented the numbers, and said, “You’ve got to get on board with this.” One division claimed that its employees were going to quit if they had to commute an extra three miles. The prospect of saving $500,000 per year didn’t have much impact on them until we insisted.

On Who Uses the Analysis. Our business unit managers use analytical information to understand exactly where they’re allocating their resources and whether they have their priorities right. Because they are close to the competition and the customers, they’re motivated to ask how many facilities they need, where they should be, and whether everyone really needs 300 or 400 square feet. They worry about our progress in colocation and about whether real estate projects are finished on time.

Our corporate operating committee is interested in revenues, customer satisfaction, and productivity. The committee doesn’t routinely need real estate information—we have to avoid micro-managing the business—but at certain levels of questioning the company’s progress, it may become very important. If the company is not making progress or if real estate projects are not showing results, we need information about how locations, square footage, and costs affect productivity in various facilities.

Our real estate professionals support these users with analysis and models, but first they had to develop the data and a real estate database. One of their toughest hurdles was resolving inconsistencies among the many types of data and sources.

On Real Estate Initiatives and Change. The process of restructuring our portfolio is a thousand-step journey. No single, bold move does it. We’re colocating divisions in the same facilities to increase communication and share infrastructure costs. We’re consolidating data centers and transaction processing in single facilities to reduce costs and leverage productivity. Those are structural changes designed to achieve sustainable growth, not just onetime shots.

On a more specific level, many of our offices were too comfortable: They isolated us from the customer and from one another. We disposed of several “Taj Mahals” with considerable effort. In relocating our headquarters, every office, including mine, has become smaller. We “deniced” our offices, making them less opulent. To help flatten the organization, we shifted from high-rise, vertical buildings to a horizontal environment. Executives work near the people they manage instead of being isolated with other executives. We’ve also replaced private dining rooms with a common cafeteria to encourage informal communication.

On What’s Important for Senior Managers. First, start from the market and work back to real estate; don’t start with the real estate. By the market, I mean the competitive environment and how we respond to it in our effort to build customer loyalty—through price, speed, quality, and service. It’s essential to ask, “How do our current locations affect our market?” and “Can our facilities improve our competitive position?”

Second, create the physical environment where people can build links. I don’t see a future in which there are no offices or in which people don’t need to meet because they can do so in cyberspace. We have to think about business space differently because we’re going to have a more networked business environment. But we’re also going to have facilities forever so that we can bring people together.

Third, build the most competitive cost structure you can and sustain it. Most CEOs will use real estate to make that happen. One manager I know believed in the economics of relocation but wasn’t sure the disruption would be worth it. The reason to do it was the disruption—to get the organization in motion and to change people’s perspectives.

In championing the initiative, Weissman invoked three ground rules: Beat competitive benchmarks, pay back restructuring charges within four years, and use real estate to promote synergies across functions and business units. By the end of 1995, estimated annual savings are $51 million per year (a 17% reduction in costs), and the potential increase in shareholder value is $600 million. More important, the savings are due mainly to space reductions, not simply to onetime lease negotiations. Assuming D&B remains proactive in managing these improvements, its lower costs should be sustainable.

To better understand the long-term promise of the effort, consider the specifics of D&B’s pilot program in Atlanta, Georgia, where, before the initiative, three business units had six sales offices and one training center among them. These units housed 391 employees in 132,088 square feet (338 square feet per person) at an annual occupancy cost of $2,254,776 ($5,767 per person).

Leases for three of the facilities were scheduled to expire between July 1994 and May 1995; those for the other four would terminate in January 1996. Using the full set of tools to guide managers’ thinking, D&B found that it could both reduce costs and influence change within the 18-month leasing window. Concluding that none of the facilities were cost-effective, the team planned to consolidate the operations into a single new facility and to dispose of the others. To avoid undue disruption, an important criterion for the new location was maintaining the same average commuting time for 80% of the employees. The team also aimed to reduce site-related costs by identifying buildings that had lower rents, reducing operating expenses such as those for utilities and maintenance, and negotiating concessions for improvements such as interior partitioning, fixtures, and carpeting. Space was eliminated by increasing open layouts, decreasing the number of private offices, and sharing support facilities and services.

In its analysis, D&B’s team identified support space and services as good candidates for restructuring because conference rooms, mail rooms, copier rooms, and the like can be used by many different parties for their own purposes without conflict. They also found that alterations in individual work spaces would have a great impact on facility capacity (for example, ten five-by-eight-foot work units fit in the same space as five eight-by-ten-foot units), but they recognized that such changes were sensitive because of their direct impact on employees. Finally, they found that equipment space generally was oversized and underutilized. Advances in technology are consistently shrinking equipment size while increasing output; telephone switching systems, for example, can handle the same volume today that they did ten years ago in 60% less space.

The results in Atlanta exceeded management’s expectations: The staff was accommodated in 45% less space because the team stretched beyond Weissman’s target of 220 square feet per person to reach 176 square feet per person. The new rent is 20% lower. The impact of less space and lower rent produced sustainable savings of $6.5 million, or 58%, for the first five-year lease and allowed the company to pay back $1.3 million in onetime restructuring expenses in less than one year. Equally important, no employees resigned because of the changes.

D&B is applying the lessons elsewhere. Real estate specialists are evolving from order takers to managers responsible for achieving corporate objectives through transactions; they no longer simply react to users’ requests. Managers have learned how to align facilities tasks with business goals. A planning process integrating real estate, human resources, technology, and office services is being established to support business objectives.

Accommodating Change

In this era of reengineering, real estate inevitably is being managed to reduce costs. But as companies restructure real estate holdings to meet the realities of smaller work-forces and streamlined business processes, the main issue they face is how to accommodate ongoing change. And, as more and more companies are learning, real estate can help organizations change or can encumber their efforts, needlessly draining resources along the way..

Companies that manage real estate for long-term advantage follow these guidelines:

1. Real estate supports corporate strategy by leveraging locations, layouts, and leases to reduce costs, increase flexibility, and improve productivity.

2. Managers develop occupancy strategies and objectives by evaluating the company’s competitive situation as well as by analyzing internal operations and corporate culture.

3. The company uses objective, complete information to reveal portfolio opportunities, help formulate regional plans, and decide among location, layout, and leasing options.

4. Cost-benefit analyses begin with the business decision, not with the real estate decision; managers understand that the company’s needs will change during a facility’s life.

5. Affordability drives decisions about occupancy strategy and cost control; affordability is determined by considering a business unit’s profit structure and competitive situation, not by conforming to market and industry standards.

6. Managing space demand is the main lever in sustaining affordable costs once the company has reduced its space supply and has begun to use facilities more efficiently.

7. The company uses a zero-base analysis of space needs and costs to challenge standards that are set by industry benchmarks and best-practice examples.

8. Work space is allocated when and where it is needed, instead of being assigned by entitlement.

9. Employees are involved in planning alternative, more affordable work space; the greater their stake in its benefits, the more willing they will be to accept such changes.

10. Facilities are designed with generic and adaptable features—such as modular engineering and systems furniture—to maximize interior flexibility and sale or subleasing potential.

Every real estate decision has long-term consequences. But managers can build flexibility into their real estate portfolios and into individual facilities’ physical and financial engineering. Moreover, they can realign their company’s holdings, no matter how large and complex, with market and competitive forces so that these facilities remain affordable and, at the same time, support corporate goals.

A version of this article appeared in the November–December 1995 issue of Harvard Business Review.