Extravagant space decisions made prior to the GFC, as well as merger activities, have left some organisations with excessive accommodation footprints. In the current economic climate, the development of strategies to consolidate and reduce recurrent lease commitment expenditure has become a focus for many businesses.
This requires the preparation of a business case to support accommodation changes, including relocations and consolidations, lease buy-outs, lease extensions and renewals and alternative financing options.
Preparing the Business Case
An executive summary clearly identifying the recommended option, quantifying the cost implications and detailing the benefits, is the opening statement. Excessive detail is not wanted at this point. Executives do not want to make a selection between options – they will expect a clear recommendation for their endorsement.
But for the approval request to be effective, you must communicate and canvass opinion throughout the process so the recommendation is not a surprise.
Business cases do not need to be long with excessive detail, but executives need to have confidence that all viable possibilities have been considered, short-listed options analysed robustly, and the recommended option has been determined with supporting data, detailed analysis and robust argument. The cost-benefit analysis should be clearly linked back to the evaluation criteria set up at the beginning of the project.
The base case is normally ‘business as usual’ – however this is not likely to be the ‘do nothing’ option, as there is a need to responsibly maintain the status quo. This may include extending leases, compliance works or on-going workspace churn.
All reasonable possibilities, including innovative solutions, should be considered. Stakeholders need to know these possibilities have been considered, even if they are discounted for not meeting key criteria. The detailed analysis will usually include two or three options that are tested against the ‘base case.’
The detailed cost-benefit analysis and input projections should be assessed based on the same general assumptions including discount rates, materiality and analysis period. The latter will likely be the initial term of the lease or fit-out amortisation period.
The analysis outcomes will be evaluated against the pre-determined evaluation criteria. A risk analysis considering the strategic direction, projected future needs and transition requirements is usual to round off the analysis and provide clear direction on the recommended option. In support of the recommended option there should be a defined project scope, financial plan, implementation and transition program and communication plan.
Quantifying Costs
Accommodation business cases are usually all about cost savings. Operating efficiencies and potential increased business revenues seldom get a mention. As such, the focus is ‘least cost’ options – often driven by the procurement department – and the challenge is to motivate the recommended option based on wider perspectives.
Property costs over the medium term can usually be quantified without difficulty. Up-front capital will need to be spent or written-off in order to save costs over the longer term. Dependent on the strategy, the financial cost inputs may include site, building construction, fitout, technology, relocation, consultants, rental, lease outgoings and other service items. These costs will be off-set by the tenant incentives on offer and future residual values.
Consolidations are great opportunities to change practices in the use of workspaces. Savings are intuitive and easy to understand. More flexible work arrangements with improved work-point utilisation rates and increased desk-sharing can result in significant floor space reductions. Similarly, properly managed shared facilities, including joint receptions, amenities, meeting and training rooms, break-out and project spaces, can result in significant reductions in floor area and associated costs.
In addition to future recurrent costs savings, the reduced leased area footprint will also result in lower capital costs for fitout and equipment. These capital costs are generally easy to quantify, but to be successful, this changed approach to workplace usage needs to be carefully managed so be sure the cost of a change management program is included.
There are likely to be costs associated with former premises that need to be included in the analysis. These will include make-good costs and the financial commitments of existing lease arrangements.
These lease tails, usually with different end-dates, are the untidy part of consolidations.
Assumptions related to the likely financial implications often do not fully recognise the effort involved in exiting these obligations.
Economic Benefits
The economic benefits of the consolidation process tend to be the more subjective part of the analysis. These benefits may include staff efficiencies, improved service delivery and other business advantages. The challenge is how to quantify these benefits.
With a reduction in duplicated services and amenities, there will likely be fewer receptionists and other support personnel. In addition, infrastructure savings such as capital and ongoing IT costs, based on a centralised IT hub and other similar efficiencies, can be realised.
Although these savings can be quantified with ease and the specific advantage is fairly intuitive, the realisation of these savings may be sensitive and allowances for other staff related costs, such as redundancy and retraining, need to be included.
Another benefit that is difficult to quantify is increased workspace flexibility to meet changing business needs. With generic accommodation standards, workspace churn is focused on moving people and not changing built infrastructure. As business units grow or reduce, accommodation changes can be undertaken with ease, lower costs and shorter downtime. Churn cost reductions can be quantified based on analysing historic costs. Standardised accommodation will also reduce under-utilised floorspace, leading to a reduced leased footprint and associated costs.
Increased staff productivity and revenues resulting from consolidations are more difficult to quantify. Some productivity gains directly linked to accommodation decisions, such as less travel downtime between different locations, can be quantified with relative ease. The challenge is to isolate productivity gains from the accommodation consolidations from the gains achieved through other corporate activities.
It is usual in times of consolidation for many other organisational improvement initiatives to occur. Although these initiatives complement each other, they are often subject to separate approval processes.
The challenge is to ensure the property gains are recognised in the accommodation business case and are not subsumed into other corporate approvals.
Less Tangible Benefits
Other less tangible benefits, such as improved workforce engagement, are also difficult to measure. Research has shown that appropriate workplace design solutions and support amenities can contribute to feelings of belonging. Team spirit and productivity is improved with employees linked into shared corporate values.
This may be quantified through assumptions of reduced staff stress, less sick leave and a fall in recruitment costs based on lower staff turnover, but this does not reflect true productivity gains. A projection of increased revenues is difficult to prove.
The benefit of diverse business units sharing common amenities, with the increased possibility of innovation and creative outcomes, can lead to greater corporate success, but is complex to quantify. Informal communications in corporate cafeteria, circulation and breakout spaces have been shown to improve integrated thinking and communication. Once again, the potential financial gains based on improved competitive advantage are usually difficult to robustly defend in the consolidation business case.
Ironically these less tangible benefits, if they could be accurately measured, are likely to make the other cost imposts and financial gains appear insignificant.
This ultimately is the real challenge in motivating accommodation consolidations. The more engaged the business unit leaders are in the process, the more likely that they will acknowledge the benefits and support efforts to quantify them.
