7 Reasons Why Office Optimization is Important

March 11, 2020 Don Catalano Don Catalano

Office optimization accomplishes more than just saving your company money on its expensive commercial real estate. Done right, it saves you money. But it also creates more productive workspaces that lead to happier employees. It also provides data that you can use to make better decisions as your company expands its portfolio.

 

Office Space is Expensive

While every company's profit and loss statement comes out differently, if you stack-rank your top five expenses, your commercial real estate expenditures probably make that list. Along with items like labor costs and the cost of goods sold, office space is expensive.  There's a saying in business that you can't cut your way to profitability, and while that's true, it's also true that it makes sense to carefully examine your top expense lines.  Office optimization is about making sure that every penny is being spent wisely and efficiently.

 

While commercial real estate agreements might seem fixed, at least for their lease term, their legal nooks and crannies hide flexibility to manage and optimize them than you might expect. The yearly expense budgets that come from your landlord can be audited. Errors in the lease can get found -- and fixed -- at every time. You can use your spaces more strategically, squeezing more value out of each square foot. And you can find ways to shed unused spaces through consolidation, sublease, or assignment to another tenant, reducing your expenditures even if you're still technically responsible for the remaining term of the lease.

 

Your CFO... And Your Board... And Your Shareholders Are Watching

As we said above, you can't cut your way to profitability, but you still have to pay attention to expenses. Cost savings flow directly to your bottom line and productivity enhancements flow right to the top line. Since office optimization ties directly to financial performance, it's a great way to make your stakeholders happy and to make you look like an excellent steward of your company's resources.

 

Optimized Spaces are Learning Spaces

While we've talked a great deal about the direct financial impacts of office optimization, it's an iterative learning process. The process starts with you learning more about each location in your company's portfolio and ends with you learning new insights about how you use your real estate as a whole.

 

To optimize your offices, you have to understand them. This process usually means going through each space and collecting metrics. Then, you abstract your leases to find and catalog the meaningful details of your agreements with your landlords.  For many companies -- especially those with relatively large but under managed portfolios -- this process adds value.  Do you know how many empty desks you have in your back office in Wichita? Or which office is seeing consistent 5 percent annual operating expense increases? Why you've had to write a CAM check every year in Denver?  Or that you've been paying holdover rent in Houston for three years because no one noticed that the lease expired? Auditing your entire portfolio can help you find and investigate potentially expensive issues like these.

 

Once you have the individual data, you enter the next phase of the office optimization process. The information arms you to build benchmarks for your portfolio and to further optimize. Why does your Boston office have more square feet per employee than your St. Louis office? Why are absenteeism rates three times higher in Dallas than Houston? What's going on in Phoenix that your electricity cost is so much lower than any of your other hot weather offices? Why do employees stay so much longer in Omaha than in any other Midwestern office? This comparative data grounds each office relative to your company's norm and lets you find outliers. Then, you can use the positive outliers as models for other offices to adopt while figuring out ways to fix (or excise) the negative outliers.

 

Suboptimal Spaces Cost More Than Money

A problematic space can do more than just waste resources. Bad office spaces affect morale, productivity, and retention. A too-big and too-empty space doesn't just burn up rent dollars. It dissipates energy, reduces collaboration, and potentially leads to retention issues. Poorly configured spaces can reduce employee health and morale. And spaces with undesirable locations or designs can turn off employees and customers.  On the other extreme, too small spaces might save money in the short term, but can also reduce productivity as your employees fail to find the privacy and quiet they need to focus and get work done.

 

FASB Wants You to Do It

The study you do as part of the office optimization process has a key additional benefit. The revised FASB Lease Accounting standard that went into effect at the end of 2018 for public companies and that is scheduled, as of March 2020, to go into effect for everyone else on December 15, 2020, requires you to do it.  To properly account for anything but the shortest-term leases, you will have to separate the actual lease value (your right of use, which is an asset) from the underlying financing (your payment stream, which is a liability) that is implied by the lease. Breaking these aspects of the lease out requires you to understand the underlying value of your right of use of the property and to clearly understand the payments that the lease requires you to make during its term and its option term. To do an office optimization, you're going to need to have all of this information anyway.

 

How Office Optimization Leads to Maximization

Ultimately, office optimization leads to the maximization of your company's real estate in three ways.

  1. Maximization of Savings. Seeing everything you have in one place helps you save money in multiple ways. It lets you immediately spot red flags and deal with them. Having a holistic view helps you build strategy for each location to determine which ones you keep, which you close, which you move, and which you renegotiate.

  2. Maximization of Productivity. Understanding the operating benchmarks of your portfolio prepares you to create spaces that work better for the people that occupy them. Whether you're tweaking sizes, configurations, locations or amenities, data helps you understand which offices work well for your workforce and which ones don't.

  3. Maximization of the Portfolio. The office optimization process gives you an overarching perspective on your company's commercial real estate portfolio. All of the individual steps that you take lead to maximization, but the overarching view prepares you to step back and ask deeper questions at the point where physical space, culture, and long-term plans align. Are you a downtown company, a suburban downtown company, or a suburban company? Do you prefer open or closed work plans? Are you planning to grow or shrink your commercial real estate empire? This isn't about maximizing for today -- it's about your best possible real estate plan for the future, and the first step on that road is understanding where you sit today.

 

Conclusion

Office optimization saves money. But it also does more than that. It lets you build a physical representation of your company that reflects its values, supports and motivates its workforce and propels its strategic plan into the future. 

 

Here are a few other article we think you'll enjoy:

What to Know About Your OPEX (Operating Expenses)

Why a Properly Negotiated Sublease Clause is so Critical to Your Commercial Lease

 

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