Consolidations and co-locations: How to prove the benefits?

by FM Media
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Intuitively consolidation and co-location property strategies seem to make sense. But when it comes down to developing the business case, writes RODNEY TIMM, proving the benefits is usually more problematic.

Any analysis of the business case for property consolidation or co-location will have a number of aspects: short-term hard expenditure, long-term recurrent cost savings, and the other financial benefits to the company through productivity and competitive advantage gains. The first two are usually relatively simple to quantify, the last is more problematic to prove. This will be both in terms of robust argument as well as projected financial gains attributable to the consolidation strategy – isolated from other business activities occurring over the same period.
Over the last few years, the fallout from the global financial crisis has once again brought cost cutting measures back into the spotlight. Expenditure on properties and facilities is no exception. Property decision extravagances prior to the crisis as well as merger and acquisition activities have left organisations with widespread and excessive property footprints. Strategies to consolidate and reduce medium- to long-term recurrent expenditure on lease commitments can usually be determined and quantified with relative ease. Likewise, the property cost benefits over the medium to longer term can usually also be quantified – though it is important to take a longer-term perspective to realise these benefits. The norm is that up-front capital will need to be spent, or write-offs taken in the financials, in order to save more money over the long term.

NOT SO EASY TO QUANTIFY
Despite the significant productivity benefits that can accrue from consolidation and co-locations, these financial benefits are not that easy to quantify. And usually in times of consolidation and rationalisation there are many other initiatives that are happening in the organisation. How, then, to isolate the productivity gains from the property consolidations from the gains achieved from these other activities? This is the real challenge motivating additional short-term property-related expenditure to the leadership team for approval.
Property and facilities savings are intuitive and easy to understand. Smaller leased footprints resulting from shared receptions and amenities, co-located meeting and training rooms, as well as generally available breakout and project team spaces, are all likely to result in leased floor space area savings of 5–15 percent. This translates into recurrent cost savings in rental, outgoings, occupant services such as cleaning and security, as well as utility costs, including electricity, water and waste services. These recurrent costs saving can be quantified in financial terms based on prior expenditure and industry benchmarks.
Additional savings in relocations to consolidated premises will be in lower capital cost requirements covering fitout and equipment, resulting from reduced leased area footprints. These costs, together with the supplementary costs of professional consultants and contractor profits, are easy to quantify and will usually represent the up-front capital required to generate future ongoing recurrent property costs savings.
Financial commitments in the existing lease arrangements should not be viewed lightly. The untidy part of consolidation strategies is having a number of existing leases in place with a variety of lease end-dates. Unless well planned up-front, lease terminations are seldom co-terminus – particularly if there have been a number of mergers or acquisitions. Often the uninitiated assume that any lease tails can easily be sub-leased and do not recognise the major effort and usually significant financial implications. Financial enticements in the form of agents’ fees, tenant incentives and marketing costs are seldom reflected accurately. Too often business cases are in the sub-leasing assumptions, with the result that actual lease tail costs are likely to be higher than the budget.

OTHER SAVINGS
Potential savings in workforce numbers and other support amenities are one of the other cost savings over and above the property-related costs that are relatively easy to quantify. There may be some significant capital and ongoing IT saving with a consolidated platform such as a single UPS and moving to a centralised IT hub. But advice from an IT expert is advisable. Although the specific advantage is fairly intuitive, the realisation of these savings may be sensitive within the organisation. With a reduction in duplicated services and amenities, there will be reduced requirements for receptionists, support personnel including IT and facilities site managers, as well as infrastructure. These staff and operating cost savings can be quantified with ease but should include allowances for other additional staff-related costs such as redundancy and re-training.
Consolidations are great opportunities to change practices in the use of workplaces – and if managed appropriately they are great enablers of change in addition to reducing recurrent accommodation costs. Many organisations have realised the benefit of using more virtual, distributed and flexible work arrangements, leading to increased workstation sharing arrangements with allocations of only 7 or 8 work points per 10 full-time employees. Similarly, a move to open plan work points will result in savings. As with shared amenities, the reduction in required floor area and associated costs can be significant; in some examples savings of 20 percent plus have been realised. As before, these savings can be quantified but this changed approach to workplace usage needs to be carefully managed if implementation is to be successful. Do not forget to include the cost of implementing the change management programme. Another management advantage of consolidated premises involves increasing accommodation flexibility to meet changing needs. With a move towards generic corporate accommodation designs and layouts, churn becomes focused on moving people and not changing built infrastructure. With this approach, as business units grow or shrink and accommodation needs change, these requirements can more easily be accommodated, with lower costs and shorter downtime. These projected reductions in the costs of churn can be significant and can be quantified based on historic charges. This approach to generic and flexible workplaces will usually also reflect an overall reduction in floor space required to accommodate changes into the future. In the business case this ‘whole-of-business’ approach to accommodation management can be reflected in projected savings compared to historic costs.

STAFF PRODUCTIVITY
Increased staff productivity and revenues based on consolidations and co-locations are more difficult to quantify in financial terms, particularly in processes where these property-based productivity gains are isolated from other corporate change activities. Usually, when a consolidation opportunity presents itself, astute companies make use of impending change to implement a range of other changes to the way that the business manages the workplace and its workforce. These initiatives generally complement each other but often have separate business case and approval processes. Clear corporate direction needs to set the principles of the division of the financial advantage. Facilities managers need to ensure that the property gains are recognised in their consolidation business cases, and that they are not subsumed into other corporate initiatives and approvals.
Some productivity gains can be quantified financially relatively easily. For example, less travel downtime between business units in different locations. Other consolidation benefits such as improved workforce engagement may be more difficult to quantify and usually require support from the human resources team. But the industry has shown that with the appropriate design solutions and support amenities the workplace can contribute to feelings of belonging. Team spirit and productivity can be raised to a new level with a shared mission and corporate values. This advantage can be quantified through the assumption of less staff stress, reduced staff downtime for sick leave, and a fall in recruitment costs with lower future staff turnover projections.
Probably the most complex financial gain to quantify in a consolidation with many business units sharing common amenities is the potential for increased innovation and creativity, leading to greater corporate success. This may result, for example, from informal communications and interactions in the corporate cafeteria, circulation and breakout spaces. These types of potential financial gains, together with other improvements in competitive advantage, are usually difficult to articulate and robustly defend in the consolidation business case submitted for approval. Ironically, these are the benefits that if accurately measured make the other costs and gains appear insignificant. This, ultimately, is the real challenge for consolidations – but there is probably no easy solution. However, the more engaged the facilities manager is with the business unit leaders, the more likely that they will be prepared to acknowledge these benefits and support efforts to quantify them.

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