Corporate Real Estate Asset Management Strategic Positioning and Operational Effectiveness

M Paul A. Rogers, MBSc, Dip.Env.Mgt, Dip.En.Mgt: Senior Consultant RDT Pacific; paulrogers@rdtpacific.co.nz

ABSTRACT This paper examines the driving forces affecting Corporate Real Estate (CRE) performance and functionality, and offers two methodologies; Strategic Positioning and Operational effectiveness, to embrace these forces enabling greater leverage and value from CRE assets. The formulation of strategic alliances is also advocated as a means of offering significant benefit to CRE performance.

The CRE Environment

Global competition, technological breakthroughs, work force diversity, and new product demand are dramatically changing the CRE environment. In many organisations re-engineering strategies have provided only temporary relief from the unrelenting demands of todays markets. Because the majority of industries are no longer highly structured or easily defined business has become increasingly complex. With the dismantling of trade tariffs and barriers, globalisation has served as a catalyst for change necessary to improve shareholder value. Information technology (IT) has also been a key driver in flattening hierarchies which has led to more flexible and competitive organisations. Management scholars and industry gurus alike emphasise the importance of identifying a companys core competencies. These competencies provide access to many markets, confer important benefits to customers within those markets, and make imitation by competitors onerous.1 Senior management is now compelled to build consensus about core capabilities that can be benchmarked, because they are vital but not unique to the corporation, as well as critical capabilities that distinguish a companys products or industry position.2 By defining a corporations competitive advantage as its core competencies and critical capabilities, senior management is free to create networked operations. These new corporate forms spur flexible workforce arrangements. Central headquarters and business unit staff work with other corporate staff and external providers who are dispersed where the corporation needs them. Until the 1990s, real estate facilities were viewed by many organisations as a by-product of business strategy that required maintenance and occasional upgrading. Obsolete facilities were disposed of or left vacant by individual business units or departments. Ingenious real estate solutions emerged in response to thorny business problems but were often hard to replicate. Corporate efforts to reduce costs and improve customer service have also driven major restructurings, with significant challenges to CRE organisations. Organisations are dropping non-core businesses permanently or replacing them with new alliances to gain leverage and cost improvements. CRE issues are a significant factor that require attention early in these decisions. In the real estate and facilities areas, improvements in profitability are being sought through managing total occupancy costs all items that eventually reach the financial statements of groups, divisions or companies.

G. Hamel and C.K. Prahalad, Competing for the Future: Breakthrough Strategies for Seizing Control of your Industry and Creating the Markets of Tomorrow (Boston: Harvard Business School Press, 1994), pp. 149-176. 2 R. Tomasko, Intelligent Resizing: (Part 1) View from the Top Down, Management Review (May 1993), pp16-21.

This involves a more rigorous analysis of rent, depreciation, utilities, property taxes, financing costs, furniture, fixtures and equipment expenses and churn (costs associated with facilities reconfigurations) as they relate to long and short-term impacts. Clearly, real estate actions taken by CRE organisations vary widely according to corporate missions and the strategic directions of their companies. A number of general statements, however, can be made. CRE efforts directed at improving corporate profitability require a wider field of attention than simply cutting occupancy costs. These initiatives encompass managing to improve revenues (the top line), while comprehensively managing all expenditure costs of doing business (the bottom line).

Asset Ownership Structures Core versus Non-Core

Real estate asset ownership can be broadly split into two categories. The first or primary category is organisations that own real estate assets for the purposes of investment. This ownership produces a return or yield on their investment through rental income. Primary category owners classify real estate as a core (or part of a core) function of their investment business. Examples of primary ownership include Syndications, and Real Estate Investment Trusts (REITS). The secondary category of ownership is the most common, whereby ownership of real estate is an auxiliary function in support of the core business ie, a telecommunications business or educational institute. The distinction between these two is important in recognising the applicable strategic management focus. Each category has its own distinct complexities that will determine the most appropriate strategy to be used.

CRE Strategies Strategic Positioning & Operational Effectiveness

The focus on real estate ownership centres upon the relationship between real estate and the organisations core versus non-core business activity or purpose. The focus on real estate asset management also evaluates core versus non-core assessment with an emphasis upon cost competitiveness through organisational performance enhancement and smart market positioning. For managers charged with the responsibility of managing an organisations real estate assets, the focus has shifted from being a cost centre administration task to managing a central supporting resource that leverages greater organisational effectiveness whilst optimising operational expenditure. This paradigm shift has elevated real estate to the position of Fifth Business Resource after capital, information, people and technology. These resources, when managed collectively and effectively have become an essential business tool for competitive organisations. For an organisation to be successful and to grow its revenue stream, it must be committed to three factors: 1. 2. 3. Manage for uniqueness Develop a distinctive competence Create competitive advantage.

Of these three factors, the development of a distinctive competence is perhaps the most critical as this allows differentiation from rival organisations. This strategy is (known as) Strategic Positioning.3 Strategic positioning means performing different activities from your rivals or performing similar activities but in different ways.
3

See, M. Porter (1996), What is Strategy, Harvard Business Review (Nov-Dec), pp 61-78. CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 2

A business can only out-perform its rivals if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or perhaps do both. Delivering greater value allows a company to charge higher unit prices; greater efficiency results in lower average unit costs4. This is the arithmetic of superior profitability. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Cost advantage is influenced by Operational effectiveness which means performing similar activities better than rival organisations perform them. Operational effectiveness includes, but is not limited to, efficiency. It refers to any number of practices that allow an organisation to better utilise its inputs by, for example, reducing defects in products or by faster service delivery. In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways. Figure 1 illustrates these differences:

REVENUE
Strategic
* Differentiation * Uniqueness * Core Competencies

Positioning

$
* Benchmarking * Outsourcing * Re-engineering for Productivity Inhancement * TQM * Supply Chain Optimisation

Operational

Effectiveness

EXPENDITURE

FIGURE 1: Strategic Positioning and Operational Effectiveness (Rogers, 1999).

Strategic positioning and operational effectiveness strategies provide essential mechanisms for leveraging CRE value. In determining whether to adopt strategic positioning or operational effectiveness (or a combination of both), you must assess the relationship between your organisation and its usage of real estate. The ownership of real estate determines the appropriate strategy. Primary asset ownership relies on three strategic positioning key enablers and two operational effectiveness key enablers. These are: (Strategic Positioning) Maintaining the strength and quality of the tenant covenant Quality of the building portfolio (and its ability to retain or attract tenants) Superior management of the real estate assets (Operational effectiveness) Supply chain optimisation Strategic alliances with service providers.

1. 2. 3.

1. 2.

Secondary asset ownership relies on the same two operational effectiveness enablers above plus a third Work Space Re-Engineering.

Porter, ibid CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 3

Primary Ownership and Strategic Positioning Options

Key enablers are leverage tools that either add or deliver value to your CRE assets. As a primary asset owner seeking to achieve sustainable competitive advantage, whilst countering external market influences, requires pro active, value added initiatives. Positioning strategies become an attractive competitive approach whenever tenants needs and preferences are too diverse to be fully satisfied by a standardised product. To be successful with a positioning strategy, primary asset owners need to study tenants needs and behaviour carefully to learn what tenants consider important, what they think has value, and what they are willing to pay for. Then the primary asset owner has to incorporate one, or maybe several, attributes and features with tenant appeal into its product offering enough to set its offering visibly and distinctively apart. Competitive advantage results once a significant number of buyers become strongly attached to the differentiated attributes and features. The stronger the tenant appeal of the differentiated features, the stronger the asset owners competitive advantage. Successful strategic positioning allows a firm to: Command a premium rental (above or well above market rate) Increased tenure term and/or Gain tenant loyalty (because tenants are strongly attracted to the differentiating features) Strategic positioning enhances profitability whenever the extra price (or longer lease term) the asset commands outweighs the added cost of achieving differentiation. Asset owners differentiation strategies fail when tenants dont value the brand or rentable space uniqueness enough to rent it instead of rivals space and/or when a companys approach to strategic positioning is easily copied or replicated by competitors. Owners need to consider the tenant as a long term partner to ensure retention and rental cash flow; strategic CRE positioning initiatives include: 1. Branding the asset By branding the building asset (or portfolio) as the best in its class (grade or level) from a physical perspective (facade, services, space functionality and sometimes location) differentiates it from its competitors. Kiwi Income Property Trust and the AMP Office Trust have, between them captured ownership of the top commercial office buildings (A Grade/International Quality) in New Zealand and brand their real estate investment portfolios accordingly. Opportunities for second tier B grade owners also exist. By upgrading B Grade space (through re-design, refurbishment and building services upgrades) to meet tenant requirements, such as improved spatial efficiencies and comfortable, productive workspace environments enables a price premium to be achieved ie, an increased rental often above the market rate. This methodology is gaining favour with large B/ C Grade portfolio owners, especially as the A Grade/Prime vacancy rates decrease and the importance of location address diminishes as the role of technology increases allowing traditional office work to be done anywhere anytime. 2. Best Practice Management of the Asset and Tenants In a BOMA study undertaken in New Zealand5, tenants rated building services (and the management of them) as the number one priority in selecting commercial real estate, although cost obviously plays a major part of any decision process.

R. Bird, (1995), Defining Quality in New Zealand Office Developments Relative to International Standards. BOMA Paper. CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 4

Research by the author6 showed that the quality of the operations building management and the way in which building services were managed directly influenced the occupants comfort and productivity. This is particularly important in todays knowledge worker economy (professions such as law, accountancy and consultancy, etc). Improvements in workspace comfort and productivity are critical to an organisations ongoing business success. Providing a first rate, proactive and fast responsive service to the occupants workspace requirements is essential to tenant satisfaction and helps to justify a price premium for differentiated workspace, especially if the response times are guaranteed and become a key performance indicator used by building owner and tenant alike. 3. Rental plus Operational expense Optimisation and, Lease Terms Tenants are seeking more innovative and less risky rental/operational expense options. Part of Telecom New Zealands Real Estate Asset Management (REAM) strategy is the preference for negotiating with building owners, Gross Leases, with performance elements for future accommodation sites. This strategy was directly bought about because of the traditional in-difference or in some extreme examples, incompetent asset owner-managed building operational expenses. It makes sense (from the tenants perspective) to transfer the risk of operational expense payment from the tenant (traditional Net Lease) to the real estate asset owner by capping the total cost (rental per square metre plus operational expenses) at a fixed rate. After all the primary asset owner should be the expert who best manages the cost and the performance of their own assets. As an appendix to the gross lease is a guaranteed performance criteria (key performance indicators (KPIs) schedule for the buildings performance ie, thermal comfort at 21-23C, lifts operating within certain wait times, response to building services breakdowns within 30 minutes, etc. Failure to meet the pre-agreed criteria means a rental rebate for the tenants. Flexibility with lease terms is also considered an important strategic positioning strategy. Shorter leases are increasingly the case in Asian countries where there is infinitely greater volatility of economic performance. America and Europe also seem to be following this trend7. In a world of uncertainly and increased mergers and acquisitions it makes no sense to sign long term leases which sit on an organisations balance sheet as a contingent liability. Asset owners who build flexibility into lease terms as a gesture of goodwill, are more likely to retain tenants in the advent of a major restructuring exercise.

For primary asset owners the core driver is maximising return on asset investment. It therefore follows that the cast flow (rental payment) must be protected and strengthened to leverage competitive advantage. The application of key enablers needs to be crafted around these principles. The way in which these positioning strategies are applied depends to some extent upon the state of the real estate market. Current real estate usage trends, such as corporate mergers, head office relocation to Australia and lower workspace densities (20 <14m2 per person) means an overall shrinking pool of available rental capital. Many larger tenant organisations are now using specialist space planners and consultants to advise on how to cut back space usage. Added to this is the tendency for tenants to seek increasingly superior quality accommodation that delivers greater operational efficiencies and better quality service (lifts, air conditioning, etc).
P. A. Rogers (1998), Energy, Comfort, Control and Productivity Relationships in the Commercial Office Environment Unpublished MBSc Thesis. School of Architecture. Victoria University of Wellington. Pgs 110. 7 For an overview on this topic see also, Poacher turner Gamekeeper John Whitehead, The Property Business, August 1999, Pgs 16 20.
6

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Secondary Ownership and Operational Effectiveness

Operational effectiveness key enablers are central to successful secondary asset ownership. Operational effectiveness means performing similar activities better than rivals perform them. It refers to any number of REAM practices that bring about cost efficiencies within the asset portfolio and an improvement in asset performance, often through an outsourced alliance with key service providers. Secondary asset ownership strategies are based upon operational effectiveness of the built asset(s). In its simplest form operational effectiveness means performing better the same operational activities as your competitors perform. Differences in operational effectiveness between organisations are pervasive. Some organisations are able to get more out of the inputs than others because they eliminate wasted effort, employ more advanced technology, motivate employees better or have greater insight into managing particular activities or sets of activities. These (usually very large) organisations tend to have their own REAM business group managing the lease portfolio tasks and workspace planning functions (often in close collaboration with the Human Resource and Information Technology groups). Traditional facilities management tasks are typically undertaken by a specialist outsourced service provider. Such differences in operational effectiveness are an important source of differences in profitability amongst competitors for two important reasons. Firstly smarter operational effectiveness affects cost positions and levels of differentiation. Secondly more effective workspace allocation, which is relative to organisational structures, improves the occupants comfort and productivity8. But while superior operational effectiveness can be a source of short turn competitive advantage in the long term it is nowhere near sufficient. The rapid diffusion of best practices means that organisations become more efficient (ie reduction in m2/person or $/m2 facilities costs) without individual companies becoming more profitable. Nevertheless it is an essential strategic tool as the higher an organisations costs are above those of close rivals the more competitively vulnerable it becomes. Operational effectiveness within the REAM spectrum predominantly relies upon Supply chain Optimisation (SCO). SCO focuses on matching the supply of facilities services to the demand from the organisation. Figure 39 illustrates the connection between supply chain optimisation and the support of an organisations core business.
Strategic Business Management: Strategic Direction Implications on business resources and operational requirements Strategic Inputs Strategic Inputs

Appropriate Facilities Strategic Facilities Brief

Real Estate Asset Management

Appropriate Physical Resource Structure

Matching Supply to Demand over time

Model for evaluating real estate asset management performance

Tactical Inputs Operational Asset Management: Establish Service Demand Review Structure/Processes/Competencies

Service Levels Brief Appropriate Service Performance

FIGURE 2: The Role of Strategic Facilties Brief and Service Level Brief (S. S. Then 1998)
8 P. A. Rogers, (1998) The Evolution of the High Performance Alternative Workplace New Zealand Strategic Management Journal, Spring 1998. Pgs 52 57. 9 S.S. Then, (1998) Integrating Facilities Provision and Facilities Support Services Management. Paper presented at CIB W70 Working Commission on Management, Maintenance and Modernisation of Building Facilities International Symposium, Singapore. 18-20 November 1998. Pgs 4.

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The effectiveness of the model in Figure 3 relies on the regular flow of information: localised information built up from the bottom of the operational structure and business information brought down from the core business end of the organisation. If the flow of information is maintained an equilibrium will be reached between the supply of services and the demand from the organisation and its occupants. Supply chain management is still perceived largely as a manufacturing/logistics management tool. The reality is that significant real estate asset operational and administration expense can be reduced and the performance of the assets improved through effective SCO. SCO strategies include: 1. Single Supplier Sourcing Facilities management alliances work better when an organisation reduces the number of its suppliers to a select few. This creates scale economies, gives each remaining supplier a better chance to win more of the customers business and facilitates closer working relationships. Single supplier sourcing promotes greater commitment to forming an alliance. This fosters best practice initiatives and innovative developments that assist the asset user. By giving a single supplier more reliable and greater volumes of work allows the supplier to discount cost by volume yet protects the suppliers cost structure. This methodology works particularly well where similar skill sets (ie within engineering services or cleaning services) can be utilised during single site visits. 2. Value chain linkage review The value chain between customer and supplier is linked to each other in various ways to produce more value to the final customer in this case the asset occupier. Unless a strategic alliance is in place these multiple connections can create opportunities for confusion, priority conflict, and allow destructive information leaks that do exist in traditional arms-length relationships. This friction is magnified because rivals often share the same facilities management value chain. At Telecom New Zealand the cost of performing a facilities management task can be roughly split equally between the actual delivery of the task (the technical know how) and the administration function surrounding the delivery of the task planning, travel, invoicing, etc. A customer that effectively manages (through an alliance relationship) all of the administration costs and leverages all of the potential creativity from the different key suppliers builds a tremendous competitive advantage for themselves; compared with rivals that still regard suppliers as firms whose services are brought through arms-length, price dominated transactions. 3. Electronic Data Interchange (EDI) REAM is now embracing technology as an important business enabler, substantially increasing the role that value chains and supply chain optimisation play in operational effectiveness. EDI has dramatically reduced administration costs through online document transfer, Email, webpage help desks and pro-forma web page Intranets (Building Act schedules, Health and Safety proforma documentation and standardised maintenance schedules, etc). All of these tools greatly assist the information flow by dramatically cutting time consuming tasks. These tools can also improve the accuracy of records and databases.

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Strategic Alliances and Partnering Benefits

Many of the strategic positioning and operational effectiveness enablers rely on strategic alliances to improve performance. These partnerships centre upon the integration between asset owner, tenants and service providers (facilities, brokerage, etc). These strategic alliances are central to CRE success, particularly with the relentless outsourcing of noncore activities. The largest industry in the United States is the outsourcing of facilities, property and business services which in 1998 overtook manufacturing for the first time10. Given the importance of strategic alliances and their contribution to the success of strategic positioning and operational effectiveness it is important to provide a succinct overview. With the transition to outsourcing service suppliers, a number of paradigm shifts, particularly in contract management, have been or need to be transcended. These include: 1. From input based specification to output based performance contracts. 2. Cost / price selection criteria to total value added. 3. Transfer of risk from asset owner to service supplier. For all of these paradigm shifts to be successful a strategic alliance or partnership is necessary between the asset owner and service provider. Strategic alliances between asset owners and service suppliers contribute significant value to the outsourcing process, well above the alternative asset owner supplier relationship model ie, the armslength transaction based model. These differences can be summarised in Figure 4.
TRADITIONAL
Goals and objectives not clearly defined and communicated - Organisations not totally engaged

PARTNERING
Clear mutual vision, re-enforced by strongly supported leadership tone with well-defined objectives & process, well understood expectations & measures Mutual trust forms basis for strong working relationships Shared goals an objectives ensure common direction

Suspicion and mistrust; each party wary of the motives of the other Each party geared to what is best only for them Communication structured and guarded

Open communication avoids mis-direction and bolsters effective working relationships Long-term commitment provides opportunity for continuos improvement Objective critiques geared to candid performance assessment Create atmosphere where service provider willing to come up with ideas and suggested changes Organisational access and sharing of resources

Single-project contracting

Objectivity limited due to fear of reprisal

Mistakes lead to retribution

Limited organisation access; structured procedures; self preservation takes priority over optimisation Involvement limited to project personnel Finger pointing and buck passing

Total company involvement at all levels

Work as a team to solve problems

FIGURE 4: Bridging the Paradigm Gap (CMT Model/IDRC 1996)

10

P. Ruthven, Business Services on the Way Up, Business Review Weekly, March 1, 1999. Pg 54. CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 8

For these changes to occur a drastic move away from traditional ways of managing (arms length transactions) is required. Essentially managers must move from controlling activities to mutually establishing and co-managing new processes. This paradigm shift cannot be underestimated. While academics (and a large number of expert consultants) purport to understand the concept of alliance/partnership formation the practice of partnership management continues to pose a significant challenge, particularly for local authorities. This argument is supported by the amount of literature discussing associated partnership failures. Success rates are low, with estimates suggesting that as many as 60% of all customer service supplier relationships fail.11 It is at these boundaries that failure is most likely to occur between asset owner and service supplier. Alliance boundaries are a mixture of both formal and informal interfaces. Formal interfaces encompass the control and reporting mechanisms set within the financial and legal governance agreement. Informal interfaces are more difficult to quantify. This is because informal interfaces are often intangible in measurement terms being largely of subjective nature. Examples of informal interfaces include: 1. 2. 3. 4. Trust and Loyalty Individual Excellence Emotional Passion Social Networks

The most successful asset owner service supplier partnerships that the author has witnessed are all underpinned by these informal interfaces. In affect the informal interfaces are the glue that binds alliances together to produce: 1. Improved communication and information flow. 2. Greater value to both partners as well as associated stakeholders, i.e. ratepayers and taxpayers.

Partner Selection
To develop an effective alliance requires good internal due diligence and a good understanding of an alliance framework and boundaries. The degree of mutual dependency and transfer of risk from asset owner to service supplier will depend on how much control and flexibility the asset owner wants or needs to retain. For example, one of the main purposes of outsourcing is to have the supplier assume certain classes of investment and risk such as demand variability. To optimise costs the asset owner may want to maintain its normal capacity at relatively constant levels despite highly fluctuating external market influences such as increased floor density loadings (placing greater pressure on building services). Under these circumstances, containment (or surge) strategies must be available to deal with market fluctuation. Partnerships rarely start off as strategic partnerships. Some progression is needed to build an understanding about each others capabilities and to get to know each other more fully regarding company cultures, leadership style, future direction, etc. In the service supplier functions the progression often occurs over time, as depicted in Figure 4 (next page).

11

See, K. Harragan (1998) Strategic Alliances and Partners Asymmetric. Management International Review (2B), pp 53-72. CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 9

Strategic Alliance Value

Partnership

Preferred Supplier

Vendor Time

FIGURE 4: Service Provider Relationship Spectrum (CMT Model/IDRC 1996)

In choosing your service supplier, consideration must be given to the following criteria: Clients How many clients does the supplier have and how relevant are these to the services currently under consideration for outsourcing. What references can they supply? Track Record Can the supplier show a successful record of providing similar services to their clients? What is the suppliers market reputation? Resources What staff skills, equipment and technology is at the suppliers disposal to meet your requirements. Do they have long term strategies to keep up with technological advances? Innovation What levels of innovation can the supplier demonstrate which they have implemented to add value to the management of their current clients facilities and assets. Support Does the supplier have systems such as help desks and planned preventative maintenance systems in order to provide the most effective on site support? Relationships How well does the supplier handle relationships with existing clients, staff and subcontractors? Coverage Consider the geographic coverage of the portfolio. Can the supplier show that they have the local knowledge to best serve the clients interests and is the standard of service going to be consistent between the sites? Change Management Skills Demonstration of the ability of the supplier to manage and implement a change process from an internal to an external service supplier with the minimum disruption to the clients business. Experiences with the suppliers change management processes should be sought. Company Culture What is the suppliers style of service delivery and management? Does this fit in with the clients culture? Unique Selling Points How can the supplier demonstrate the difference between their service and that of their competitors. Risk Is the supplier clear about their responsibilities and associated risks and are they willing to accept them.

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 Insurance Are the suppliers insurance policies sufficient to cover the scope of work to be outsourced. For national asset owners, a further source of superior supplier service is the suppliers ability to provide an optimised supply chain. Those suppliers who gained early market entry and built up strong (national) labour supply networks are now positioning themselves with a valuable source of value add. They are able to add value through their ability to provide large volumes of work and through-put, which in-turn drives down service delivery costs primarily through rationalising skill sets and travel costs. The vertical and horizontal integration of supply chain skill sets also offers increased opportunities for service providers. By utilising multi-skilled subcontractors, service providers can offer and manage direct delivery of a greater and wider service. By optimising the supply chain a greater emphasis is placed on the sharing of support resources and information eliminating duplication, enabling rapid information flows, and ultimately delivering more cost effective service. In building long term partnering relationships many hidden benefits can be derived year after year that will create substantial economic and performance benefits. Think of the relationship and the functions it affects in a lifecycle context. This will broaden your thinking on what to look for in creating value. Some examples of value drivers are listed below: Improved Service Leadership Driving for market-innovative leadership with a view to be the best as measured against competitors. Enhanced Service Quality Striving for perfection (zero defects, zero repeat call-backs) and delighting the customer or internal client. Development of Best-of-Class Processes and Practices Investing in new technology to create competitive advantage. Better Delivery and Cycle-time Performance This creates customer satisfaction and can reduce operating costs. A One-Stop-Shop Possibility by Sole Sourcing Using one service provider to handle a variety of activities or a single service provider to handle the entire function within a broad geographic area. This reduces management time and creates a highly focused effort for improvement. A Sharing of the Functional Capabilities, Practices, or Processes Beyond the Function Under Contract Opportunities may exist for joint purchasing, or using each others products or services, human resource practices and policies, travel agency arrangements, distribution networks, etc.

Performance Contracts
The formal interface between alliance partners is critical in ensuring a stable and mutually productive relationship. To this end performance based contracts are gaining favour in the strategic alliance, CRE asset owner service supplier environment. Performance based contracts aim to create a habitat in which the interests of the asset owner and the service supplier coincide as the parties seek to achieve agreed performance benchmarks12. To ensure that the contractual arrangements are consistent with both parties expectations, consideration has to be given to: The legal and contractual incidents of such arrangements, including potential benefits and pitfalls. Ensuring that such arrangements lead to the achievement of the parties commercial objectives.

12

For a more detailed summary, see, M. Misko, Performance Based Contracts FM Australia Journal, June 1999, Pgs 38 40. CRE Asset Management -Strategic Positioning & Operational Effectiveness. September 1999. Page 11

It is also critical to assess the scope of service required by the asset owner. The owner should keep in mind: Its fundamental aim of ensuring that its CRE assets perform and are maintained in the condition required. That it will be relying on the service suppliers expertise to achieve that aim. The first point requires the establishment of meaningful and measurable KPIs. The second requires the owner to balance the following: Avoiding over prescription. Recognising that there may be a certain minimum level of services required, or that there may be certain services, which the owner has determined which should be undertaken in a certain way. A performance based contract does not necessary require all risk to be shunted to the contractor (so that, effectively the contractor becomes an insurer of the real estate asset). Rather, it requires risk to be shared between the parties in a way, which is consistent with the contractors primary role of ensuring the delivery of certain outcomes (rather than services). Performance based contracts requires a clear shift away from a baseball bat mentality driven by default; rather, incentive structures are positive, focussing the service supplier upon achieving and exceedingminimum performance. It is therefore necessary to establish KPIs which are: Meaningful, truly indicating whether the service supplier is performing in the areas closest to the asset owners heart. Measurable, enabling incentives to be clearly calculated. Set at realistic levels. To do this, setting KPI levels requires an initial base level of information whether derived from historical information within the organisation or comparable service levels within the organisations.

Summary
Riches do not consist in the possession of treasures, but in the use made of them Napoleon Bonaparte. Creating and sustaining a CRE strategy is a dynamic process requiring continual access to new information generated at the corporate, business unit and support function levels of the organisation. It requires strong partnerships with stakeholders (asset owners tenants service suppliers, etc) as well as parties who participate actively in executing CRE strategy. Optimising the costs of CRE will continue to be of vital importance to CRE management. The distinctive challenges that arise in the global business environment call for CRE services that are cost effective, sustainable and demonstrate contributions to an expanded index of business value. Organisations are critically reviewing their strategic asset management functions. Organisations such as AMP, General Electric (GE) and BHP have made significant capital gains through smarter utilisation, positioning and management of their fixed assets. General Electric, the worlds largest company, concluded two years ago that the value of fixed assets would begin to decline as technology improved manufacturing and service processes. At the same time, global capital availability would greatly increase manufacturing capacity particularly in Latin America and Asia further squeezing GEs margins. In most of its operations GE tries to limit its exposure to capital assets it prefers not to carry their residual asset risk by owning real estate, cars, computers and other equipment. It prefers to finance individuals or corporations, basing loans on their credit worthiness rather than the residual value of the asset.

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By limiting GEs exposure to physical assets through superior strategic positioning, they have substantially decreased the amount of capital required which has directly contributed to achieving substantial returns for their investors. Most Australasian CEOs aim at continued profit growth. However, as the Americans have demonstrated, the level of assets required to produce those earnings is just as important as profit growth. If you cut down on the assets required, manage and re-position more effectively you can increase corporate performance even though your profit may remain steady or even decline. Strategic alliances will also continue to play a major role in leveraging significant value from asset utilisation. Organisations that develop effective supply chain links between themselves and their customer and suppliers will reduce and optimise internal cost structures, harness smart customer-management technology (help desks, etc) and tap peoples innovative capabilities. Performance contracts will play a major part in cementing mutually stronger partnerships between CRE asset owners and their service suppliers and provide opportunities for sharing risk and reward. Organisations must assess the expected value that real estate assets play in their role in support of core business activity. Whether the asset is in the primary or secondary category, the emphasis remains on optimising its usage and ensuring appropriate levels of resource and deployment are utilised to manage the diverse key enablers.

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