In recent years both public and private sector corporate office strategy has focussed on developing a core portfolio of fewer but more effective and more sustainable properties. At the same time strategies are becoming more agile and diverse – in terms of tenure and procurement arrangements and especially in terms of space provision, occupation and utilisation. Basically organisations need to be more responsive to rapidly changing situations and property is no exception to this requirement.
This agile trend reflects both the increasing focus of aligning property with core business strategy, and grasping opportunities created by investment in new technology coupled with culture change and the recent rapid changes in business environments brought about by globalisation, sustainability and financial stringency.
Business retrenchment continues to be the tactical focus for many organisations struggling with greater competition, fluctuating revenue streams and a cost base fixed in better economic times. Consequently property as a tangible and heavy balance sheet item is very much under the microscope in terms of value to the organisation. Portfolio requirements are being urgently re-assessed against business need. Lease end and break opportunities are providing the focus for major reduction in space costs, which in turn is resulting in space utilisation and agile working initiatives seeing renewed attention and priority. The aim is to rapidly reduce overheads and generate capital receipts without harming, hopefully improving business productivity, talent attractiveness, customer service and ultimately profitability.
Property however tends to react like a juggernaut – it takes time to change pace and direction. Forward thinking organisations already have review mechanisms that align property with business strategy and they will be best placed to react to changing circumstances. Knowledge of the portfolio especially lease events and changing property market opportunities are important, but knowledge and understanding of core business requirements is paramount.
Aligning property requirements to take account of Company business – mergers and acquisitions, contract events, service shifts and financing, the focus on attracting the right people and workforce change – is key to effective and successful property strategy. Practical considerations and restraints in strategy execution need to be highlighted too. To do this you must first understand the operational limitations, availability of funding and business benefits, the required support from other areas of the business such as IT, and also remember that relocating people and operations, changing working habits and culture often meet with resistance which takes much planning, engagement and management resource.
The process of disengaging property is not always straightforward. The industry has been used to long term arrangements – 25 year leases with cumbersome rent review and dilapidation arrangements, and in government PFI arrangements. This does not generally support agile business today which looks for financial certainty and flexibility to move more of its cost base from fixed to variable with shorter commitment periods.
Indeed confirming the agile trend Glen Corney of IPD affirms that “Lease flexibility has improved gradually in recent years and across the spectrum the ‘norm’ has changed.” The IPD LeaseEvents Review confirms that over 80% of UK leases signed in the year to June 2013 were under five years – the highest proportion since measurement began. This is up from 55% a decade ago.The average new lease term is now 5.8 years from 7.8 years in 2003. Less than 6% of leases signed in 2012/13 were over 10 years in length, compared with twice that only 5 years previously, and more than 20% 10 years ago.
You may have a vision but predicting the future is difficult and therefore it is imperative to build in the ability to react and change by creating an agile property strategy . This trend for shorter lease commitments indicates that the current financial climate is forcing tenants to align lease commitments with their business horizon.
The strategy of portfolio consolidation based on disposal and renewal through new building investment continues to be severely tested in the current economic climate where disposal proceeds have receded along with cheap financing and revenue streams. Therefore strategy is now focussed on “squeezing the portfolio”, optimising what exists or cannot be exited, including subletting to the market, to outsourced suppliers or to charities, “mothballing” or de-servicing space (even demolition). There is also an increasing and irresistible movement within the public sector towards sharing space and resources through initiatives like Total Place.
At the same time strategies that leave organisations with very limited flex space are now turning increasingly to agile ”pay as you go” opportunities from serviced office and business centre operators to meet temporary needs for turnaround and short-term projects rather than invest in longer term leasehold commitments and fit outs. Astute organisations are also using their covenants and the current tenant biased conditions to “play the market” with Landlords and Owner Occupiers to find the most competitive deals for their requirements, whether this is related to existing leases or new.
This strategic drive to reduce office estate coupled with a desire to move resources to a more variable cost base is forcing some organisations towards a more virtual existence. BT for example have 15,000 registered Home Workers and 70,000 agile workers which has enabled a 50% reduction in office space in the last decade. While it is reported that IBM is currently considering the option of replacing some 299,000 permanent jobs by much fewer short-term contracts employed for the duration of specific projects. This “crowdsourcing” strategy would leave IBM with just 100,000 permanent positions with a significant impact on its need for supporting property and other management and business infrastructure.
However for the moment the “office” is far from dead. There is definitely a diminished need partly from reduced levels of business, and also from a greater focus on better utilisation, but principally from introducing new technology and new ways of working. Agile working initiatives for example enable people to work differently and virtually, sharing space, working remotely at home and in “third places” away from their normal office and in different time zones, changing and diminishing the core office space requirements, while creating a whole new raft of corporate support service requirements in Management, IT, Storage and Property. At the same time the changing nature of work, culture and new generations also demand different non-traditional types and mix of spaces, locations and work settings.
Organisations are looking closely at their strategic space needs and how they procure these requirements and the services that support them, but to do this they first have to understand and assess what these are. This involves not only knowing the estate, the property market and the supply chain but more importantly proactively getting closer to the business, understanding departmental operating plans as well as HR resourcing and change programmes, IT investment and operational initiatives. For instance, understand the property needs from off shoring or outsourcing back office functions, insourcing work from contract wins, and introducing new ways of working ; while in the public sector understand the needs beyond the organisation into the wider field of Total Place and shared services. Understand not only the numbers but the risks and opportunities these needs will create in the costs, sourcing, value, flexibility, utilisation and servicing of the desired estate.
In the past property departments were just another corporate silo and property strategy was based around existing headcount plus arbitrary growth factors or vague assumptions because no one properly engaged with the Business. Many organisations now recognise the need for support services (like property) to work in partnership with business departments and other corporate suppliers to create holistic strategies and this has led to the rise of the Informed Client and CRM (Customer Relationship Management) roles within property teams.
Property is about people and communication not just buildings and in the world today change is perpetual which must reflect in corporate property strategy. Property teams must build relationships with partners in business – both external and internal – and they must build strategy that closely supports and matches the business need and organisational objectives. Property Strategies must be agile.
I have helped a number of organisations develop and rationalise their portfolios over the last decade. Let me show you ways to reduce your space requirements by up to 35%, or using spaceless growth contain your organisation within existing space. For more information or outline appraisal please contact:
Paul Allsopp, The Agile Organisation.