Real Estate: A Massive Working Capital Opportunity in Organizational Supply Chains

I recently had the opportunity to interview a group of individuals who work for a large life sciences company in their facilities management group.  Like many such groups, Facilities are often involved in the typical activities of maintenance and upkeep of construction services, including replacement of chillers, air handlers, carpet, furniture, etc.  But the facilities group also represents an important cog in the supply chain, in that they also are involved in capital asset budgeting, planning, and development decisions.  Several of the individuals I spoke with discussed the importance of these decisions in the current operating environment.  One executive in particular noted that “most organizations, especially life sciences, constrain the quality of the build due to a strong risk aversion.  People want to overlay more and more over the basic chassis, to “future-proof” yourself to ensure nothing goes wrong.  As a result, people get more and more remote from commercial reality.  Some organizations (like Pfizer) hit commercial reality about ten years ago, and have variablized much of their capital assets.  In organizations like ours there is a newly discovered appetite and willingness to attack working capital, and this is new because in the past people were not rewarded for challenging the status quo, because it was comfortable.”

This individual went on:

“There is massive opportunity for site consolidation, but the challenge we have is legacy issues.  There is clear surplus of real estate globally, but somehow we “cannot afford to deal with it”.   Most organizations have been on a pattern of over-investment in facilities over many years.  Acknowledging that there is a problem is difficult,  because CFOs cannot admit the financial consequences of it, which involves massive asset write-offs and huge consequential costs.  It also involves moving people from places where no other corporation wishes to be (places like New York, London, and Shanghai) and where they DO want to be (rural areas with low energy costs and taxes), and massive legacy issues are coming up.  No matter how transformational people want to be, they struggle with how to reconcile these decisions with shareholders in the immediate short term.  The dynamics of the business have overtaken the issues of large blue chips, but shareholder patience is short.  The tenure of senior executives is diminishing, and yet we face the need to do the right thing for the longer term.  No executive wants to take the hit in the short term, and are hesitant because they know they will not be duly rewarded.  The result is that they don’t want to take risks in a 5-10 year horizon.

“As a result we find all sorts of crazy things.  In my new role I started to look at our very expensive corporate office (located in a major city). I am flushing all sorts of things out.  For instance, 30-40% of the occupants of our corporate office are third party contractors!  Why have we got almost 5000 people in the vicinity of HQ who aren’t our staff, and why are we housing them in one of the most expensive buildings in the city?  It doesn’t add up to any sort business plan.  And then if you look at the way we build a capital asset, the way we fund it, the way we derive an estimate for budgeting, it is all backwards. ”

“We have very little linkage or thought given to capital forecasting and centralization of real estate investments, and because of this, we have missed massive opportunities to leverage scale, supplier relationships, and collaborative contracting.  Organizations need to be thinking about how to procure real estate in a different and fungible way to be able to flex and adapt to the needs of the organizations, based on what the business wishes to do.  Our current operating model is very static and cumbersome, and we need to change.  For example, I’m exploring how we can go to a third party with a broad specification of a requirement, (say – “I need X desks in this location in a certain style and functionality”), and have the third party deliver it for me.  This would allow us to flex up and down in a fashion that makes commercial sense on a turnkey basis.  There are people in the market who are set up to do that and they are very good at it.  Now, we might pay a bit more for that service, but if we only pay for what we need, rather than building for what you don’t know and adding 10% just in case every time, this would add up to massive savings.  The ability to flex up and down is what is needed, but this requires a very different business model.”

More to come on the subject of real estate supply chains!