Document updated January 2015
Measuring toward profitability:
Using occupancy strategy to drive cost reduction, cost
avoidance and resource management
Often overlooked and underutilized, occupancy planning is a vital
business tool that strategically right sizes the real estate portfolio
to ensure that an organization is using its space efficiently and
effectively. Common sense, right? A business should have enough
seats for everyone who works there, no more, no less. But, and
here’s the catch, how do you determine this?
Two words: Meaningful metrics. If you ask the average company what its occupancy
rate is, the answer typically is “around 95 percent.” However, studies show that
average occupancy rates run closer to 50 percent. That’s a huge margin of error—and
a lot of wasted dollars from real estate lying fallow. Getting the portfolio right starts with
measuring it accurately and consistently over time. Accurate numbers give you a true
picture of who, how and when employees occupy space. And when you have the right
information, you can make informed decisions about real estate that can directly
affect profitability.
SG&A
Headcount
Real Estate
Occupancy
Utilization
Revenue Growth
Cost
Asset Efficiency
Most organizations do some kind of occupancy
planning internally. However, typically it tends
to be more of a one-time plan rather than an
ongoing, integrated approach. In trying to decide
if you should partner with a specialist, ask
yourself the following:
• Do we have the bandwidth to handle the data?
• Do we have the personnel with experience
to maintain it?
• Are we working with best practices and
industry standards?
• How will we continually upgrade our
technology, analytics and knowledge base?
• Is our data collection measurement system
only IT focused or does it incorporate strategy?
• Do we have the training and the insight to
interpret the data into actionable strategies?
SG&A
Cost of
Sales
Should you outsource your
occupancy planning strategy?
• Do we view occupancy planning as a static
or active practice?
Gross Operating Margins
R&D
Profitability
Free Cash Flow
Stock Price
How Occupancy Strategy Contributes to Company Stock Price
In or out?
Capacity
Managing by metrics
Your organization’s secret weapon
Developing metrics is only part of the solution, however. You also need to
know how to read your measurements and understand what they signify.
Only then can you use them as a springboard for significant and strategic
change. Here are four key ways you can use metrics to right size your real
estate portfolio and, ultimately, drive profitability.
Can an occupancy planning strategy really accomplish all this?
Absolutely. And because it is based on metrics, CREs can both prove
it, and add value to their organization. The key is implementing the
measures so they are fully integrated across the portfolio and then
accurately interpreting the data to use it to best advantage. With a fully
integrated, progressive plan in in place, an organization with a portfolio
that covers 15 million to 20 million square feet could see $50 million
to $60 million in savings (both cost savings and cost avoidance) over
a three to five year period. How to start? Depending on the size of the
portfolio, it can take three to 12 months to put the metrics in place and
establish benchmarks. Organizations begin seeing actionable results in
12 to 18 months.
Creating Agility. When you understand what your metrics tell you, you can
respond more quickly to business drivers and avoid threats. For example,
you can take advantage of market opportunities—sell high, buy low—
instead of scrambling to acquire or unload space reactively. When you
know the amount of seats supported by infrastructure (design capacity), the
number of seats built out (current capacity), the space allotted and held by
each business units (shadow vacancy) and the real estate held for future
use (corporate vacancy), you can start to align occupancy with business
strategies as they evolve. This can eliminate the hoarding of space by
individual business units, identify and revamp obsolete business structure,
and spur you to invest in more agile space overall.
Building in Responsiveness. With good metrics, you can implement an
effective demand planning program so you can understand the long- and
short-term needs of the business. This gives you the flexibility to respond
to business cycles, for example, times when you need more space to
conduct business. The data also helps you decide how much vacancy to
bake into your footprint which, in turn, helps prevent renegade moves—an
individual seizing a larger vacant office, which plays havoc with the data
reporting—as well as churn (defined as the number of individuals moved
annually divided by the number of total people). These kind of unplanned,
poorly planned or reactive moves can result in significant annual savings
and can keep business units appropriately aligned.
Supporting Optimization. When you have hard data on density targets,
sharing ratios, occupancy targets and cost per person by monitoring the
portfolio over time, you will be able to show how real estate action can
influence the financial targets. The data can be shared with leadership to
make decisions, support business goals and strategies, and implement
meaningful and measurable change against targets.
Occupancy Planning Business Impact
60
Savings in millions
Pinpointing Opportunity. Metrics can help you identify all the outliers.
That’s step one. Step two is to understand what has caused them to be
outliers. With a baseline of space and people data (square footage per
seat, square footage per person and cost per seat), you can see where
space is underutilized or oversubscribed. You can find improperly sized
seats—that is, any type of workstation or space used by an employee, be
it chair, cubical or office—and understand the office-to-cube ratio. From
there, using benchmarks based on a current and robust database, you
can start to develop an occupancy strategy that makes sense.
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Time in years
Clearly, an occupancy strategy is not a quick fix or a one-time event, but
a long-term, integrated approach that continues to bear fruit over time.
Once firmly established, it defines the organization space standards.
Even better: All decisions and actions can be based on it. That means
that no new space can be built, no capital improvements can be
initiated, no consolidations can be made unless they align with the
occupancy plan. This drives out waste, prevents uninformed decisions,
favors long-term planning over short-term fixes, and keeps the portfolio
continually optimized. The end result? Real estate becomes a relevant,
even vital, tool for contributing to an organization’s profitability.