”Rightsizing” has nothing to do with the fit of a business suit or the width of a pair of wingtips. But it may become just as much a part of America`s corporate culture.
As companies struggle with the bottom line, many are downsizing to remain competitive: eliminating jobs, scaling back operations or trimming budgets.
But when it comes to the requirements of physical space, corporations are looking to rightsize, a term being applied to a rather new strategy that aims to maximize value from owned or leased commercial real estate.
And rightsizing may prove to be a major element in the strategic plan for any corporation seeking an edge in tomorrow`s marketplace.
”Once, real estate represented maybe one percent of the value of a company. But now, with downsizing, real estate is sometimes 25 to 30 percent of a corporation`s assets,” said Laurin McCracken, vice president of development with the architecture and planning firm RTKL Associates Inc. in Dallas.
”And they have to look to get added value from that,” he said.
The terms downsizing and rightsizing are often confused and have caused some consternation among corporate real estate executives, most of whom have the responsibility of implementing any space-planning strategy for their firms.
Many of those executives gathered in Seattle recently for the annual symposium of NACORE, the International Association of Corporate Real Estate Executives.
”I can`t help but think of being in college and of seeing how many people we could cram into a VW Beetle. You could get 18 or 19 kids in, if you did it right, filling the back first and packing around the gearshift properly,” said Craig Anderson, senior project manager for IBM`s southwest region.
”A lot of people think that is what rightsizing a corporation means. But that implies that there is a definite, finite solution for all companies, and that is just not the case,” he said.
”Corporations that say `reduce your space by 20 percent` remind me of having a cotton sweater that gets put in the hot dryer-it`s only going to fit someone very small. Indiscriminate shrinking is not the answer. Rightsizing is really asking what the corporation needs to do the job,” Anderson said.
As more and more corporations begin to fine-tune their property planning, outside real estate firms are finding an increasing amount of consulting work coming their way.
”What has driven the focus (on rightsizing) is the growth in occupancy costs. We deal with six of the Fortune 200 firms and in real terms their occupancy costs have all doubled during the 1980s,” said Mahlon Apgar IV, principal of Apgar & Co., a Baltimore real estate consulting firm.
”To size a business in physical terms and in lease terms, you really have to start with the business plan. Space requirements have to be linked to corporate strategy,” Apgar said.
”That is still rare in American business circles, although it has been more apparent to the Japanese because they have had to deal with high costs since World War II,” he said.
Apgar`s firm helps companies decide just how much office or other space they need by taking them through Zero Based Space Budgeting, a program that involves analysis of 30 to 40 areas within the corporate structure.
The size of everything from managers` offices to the storage closets is factored.
”Generally, we find there can be a 25 percent reduction in space requirements for companies that use the system,” Apgar said.
The biggest space hogs, he said, are meeting rooms. He estimates that every corporation in America has about 50,000 square feet of meeting rooms that it can do without, a figure that can translate to an average annual savings of $1 million for a company paying $20 per square foot in rent.
”If you`re providing meeting space for 2,000 people who meet only once a year, you`re a lot better off paying for a hotel room than adding it to your office lease,” IBM`s Anderson said.
Yet because there is so much overbuilding of office space in most U.S. markets, companies that work to get by with 30 percent less space may find it is just an exercise in fiscal futility if they can`t sell or sublease the space they vacate, Anderson said.
”We`re attempting now to vacate the leases we have where they are coming due and consolidating back to older, owned facilities that we have,” said Gerald Vanella, president of the real estate subsidiary of defense contractor Grumman Corp.
”We`re also in the process of trying to sell excess properties. We don`t want to lease them out, but that`s about all we can do right now because the market is so bad,” he said. Some facilities are being used at 60 percent capacity or less, he said, facilities that in a better market would be sold.
Even though corporations face a big-time squeeze on profits and are willing to cut real estate costs in order to add to the bottom line, space costs for a typical firm are usually no more than 5 to 10 percent of overall costs. Payments of wages and benefits to employees cost 10 times as much.
Vanella gave this breakdown for comparison: A typical employee earning $50,000 a year plus 35 percent more in fringe benefits will cost a company $67,500 annually. The rent on the average space that employee occupies, 225 square feet at $20 per foot, amounts to only $4,500 per year.
Still, rent savings can be substantial.
In an eight-week assignment assisted by RTKL`s Dallas office, IBM was able to consolidate two Dallas-area offices totaling 300,000 square feet into one location of 150,000 feet. Anderson said the move may have cost the computer giant about $2 million, but the annual rent savings will amount to about $2.5 million.
Part of the reason for the reduced space requirement was the reduction of an unspecified number of employees. But savings were realized from elimination of duplicate function space, such as training and education rooms, and in a reduction in the per-person allocation of square footage.
”As more people do this, there will be peer pressure to compete. No one wants to explain 250 square feet per person to their boss if the competition is doing it with 150 feet,” Anderson said.
The average amount of space dedicated to an office worker in the United States has risen steadily since 1971, when 156 square feet was the typical allocation. By 1990, that standard had risen to 252 per office employee, according to the Building Owners and Managers Association International.
”But people are starting to make do with less today. I`d say that number has dropped precipitously since then,” said Bruce Michael Hoch, principal of Development Concepts Group, a real estate consulting firm in New York City.
One New York City-based money center bank that has hired Apgar`s firm is representative of the thinking about space reduction under way in corporate America.
The bank is in the process of shedding 2.5 million square feet of office space and could drop 2.8 million feet more if an aggressive reduction program is implemented, Apgar said. Total annual occupancy cost savings from the moves could top $70 million, he said, enough to double the firm`s earnings based on 1991 figures.
”What gets you to downsize? A year or so ago we made headlines because we were close to bankruptcy and we posted a loss of $610 million in one quarter. That will do it,” said Douglas Kington, assistant vice president of home office administration for the insurance firm of USF&G Co.
”The mandate to me was: Reduce the number of offices,” he said.
In the last 18 months, the insurance firm has dumped more than 500,000 square feet of office space across the country, trimming the number of branch offices to 36 from 54.
Those offices that remained were also more tightly monitored in terms of the amount of space they needed, Kington said.
”For example, we stored files in the offices because we didn`t know what to do with them. We had no purge policy,” he said. ”We had no warehousing in outer, less expensive areas. These are the things we began to work on.”
Less space doesn`t always mean fewer employees, but in USF&G`s case it did: More than 3,100 people lost their jobs in the restructuring.
But rightsizing sometimes means more employees using less space, just maybe not all at the same time.
In Chicago, the accounting firm of Ernst & Young decided it could reduce the office space it occupied in a move from three city locations, which began in early June, to a single, 350,000-square-foot block in the Sears Tower, by employing a concept called ”hoteling.”
Instead of providing an office to everyone, including those out on the road most of the time with clients, the company will provide offices that can be reserved, like hotel rooms, by those employees when they will actually be in town to use them.
”This has not been done very much in the United States,” said Brian Casey, one of Ernst & Young`s local partners who was in charge of the move.
”Conceptually, the goal was to make the workplace both comfortable and efficient and as economical as we could.
”People who are out of the office a great deal of time do not get a permanent office. But they can have a fully furnished, technologically equipped office when they are here. When they know they will be in, they just have to call in,” he said.
Hoteling, which affects about one-third of its workforce, will allow the accounting firm to take about 15 percent less space than it otherwise would have, Casey said.
Such trends don`t bode well for the office development business, which already has been essentially shut down since 1990. Even if a dramatic turnaround occurs in the economy, companies are not likely to return to the days of gobbling up office space at will.
”It`s not just putting more people in less space,” Anderson said.
”Maybe it`s giving you a laptop computer and a cellular phone, or maybe a tax break to work at home. Just because you have a desk today is no reason you will need it tomorrow.
”Where will all the excess space go? Well, I have this nightmare that I wake up with the TV on and what I`m watching is the Home Shopping Network for corporate real estate.”
