The key metrics the finance department is missing out on
Gavin Maze, Business Development Manager – Occupier Division, Qube Global Software
Property – whether it be owned or leased, large or small, specialised or generic – comprises a large, if not the largest, proportion of business assets.
The role of the CRE department varies across sectors, company sizes and structures. In the past, rather than being viewed as one of the key pillars holding the organisation up, it was often placed as a less strategic department grouped with other support funtions such as IT.
However, in recent years we’ve witnessed a change. Currently, no other department has the authority to directly influence financial planning as much as CRE and their role is responsible for far more than simply managing the occupied and sub-let portfolio. In the wake of the financial crash, the C-suite turned to CRE to radically reduce occupancy costs. Now that the crisis has retreated, cost-cutting is still a primary objective. However, beyond the bread and butter of reducing the balance sheet, we’ve seen a development in the complexity of the CRE’s job description. In recent years, corporate KPIs have extended to softer metrics such as employee wellbeing and workspace optimisation.Across the board organisations expect more for less – adding to the pressure on the CRE department’s shoulders.
The value CRE metrics can bring to the finance table
Technology has been key to revolutionising the CRE’s role from a reactive to a proactive one. The leaps and bounds made in PropTech now means that the CRE can make data-driven decisions. With data analysis there is the potential to unlock business value, find additional profit margin, and directly influence change in the business. CRE executives can probe in-depth and in real-time, past and projected insights, not only quickly but in a format such as KPI reports that are easy for the CFO or CEO to digest.
Below are a couple of scenarios in which the CRE can provide the C-suite with influential data for financial benchmarking purposes. As well as key metrics that can give an overview of the organisations’ real estate portfolio using property, asset, facility and financial management platforms – such as Qube’s Horizon software.
By nature, real estate assets are clunky. As property value continues to soar in corporate hotbeds such as London, if not done right, CREcan potentially be a serious drain on resources. Say for example; the CEO of an organisation calls a meeting and explains to the board that, after a trying financial year, the company must cut costs by closing some locations by the end of the calendar year. CREs are in a unique position here to access the data required to make an informed strategic business decision.
Data can be filtered to identify which leases would be suitable for termination. For example, embedded in Horizon’s business intelligence views are ‘gadgets’ – these are graphs and charts that represent all of the data. Assets can be ranked in order of profitability, achieved by underlying data comparing two things – in this case the sales data compared against the rental value of each asset. The results can then be filtered by date of lease termination. From what is left, the least profitable assets can be identified and recommended to the CEO for termination.
On the flip side of this, the organisation has had a successful year and is looking to expand its commercial portfolio by opening a new office in central London, in line with growth targets. This is when internal benchmarking analysis really comes into play. At the CRE department’s fingertips is a vast source of data for the London area. Standard reports written in industry standard Microsoft SSRSsoftware can detail historical trends over a certain period, average cost per area or property type and so on, which can be scrutinised to make future projections. A report can detail how much the company is paying on average per asset class, whether it’s retail, office or mixed use. These reports can also take into account the impact acquiring a new workplace would have on the workforce due to elements such as relocation costs.
Utilising the real estate data to inform and support the corporate objectives to invest in new locations, such data can be leveraged when negotiating new leases on behalf of the company. In situations such as this, it’s vital for the CRE to collaborate with other business units, such as group finance to ensure that the best terms are met for the business as a whole.
No longer solely responsible for buying and terminating leases, an integral part of the CRE’s role is monitoring the performance of assets in the portfolio. This is all the more important if the asset is particularly expensive to maintain. Data on each asset can identify the top ten properties that have the highest non-lease costs, such as insurance, energy and utility bills. This can be filtered by location or lease length. Utility costs can be examined alongside the energy efficiency of the property – potentially influencing company strategy by informing on what grade of property serves best from an efficiency perspective.
For all these scenarios, the data can be presented to the C-suite in formats that are simplistic and easy to digest. Horizon’s reporting structure is entirely flexible and can be tailored according to the user. So for example, a CFO might need to see the data laid out in a way that is different to the interface used by the property management team. The CFO will want statistics, such as total revenue, but may not be interested in the nitty gritty of utility bills. All of this can be chopped and changed to suit the user and the scenario.
What next for the CRE?
We’ve established that actively managing assets, facilities and workplaces will reap the business benefits. The next game changer for the CRE is the new lease accounting standard, IFRS 16, which some are claiming will prompt a re-evaluation of real estate strategy and increase focus on real estate in general. We’re anticipating that the the C-suite will consequently review their CRE strategy to align with broader corporate objectives. For the CFO, IFRS 16 will directly impact almost all common financial metrics as all leased assets are brought onto the balance sheet.Additionally, the strain of recording significantly more assets may have tax implications that the CFO will have to consider. So perhaps now, more than ever, open channels of communication between the CRE, CFO and C-suite at large has never been more relevant.
As the role of the CRE department has undeniably matured, thanks largely in part to technology, CREs have upgraded from fragmented excel spreadsheets to centralised data management. A data-centric approach with sophisticated analysis needs to be embraced, with CRE real estate continuing to hold pride of place at the top of any organisation’s balance sheet. It simply makes good business sense.
And with the increasingly digital nature of work, as well as IFRS 16 on the horizon, CRE executives can feel empowered by the fact that not only are their insights indispensable, they can directly impact positive change within an organisation.