Corporate real estate is a canvas that is to be painted on. No two solutions should ever be the same. The way you made decisions yesterday should not be the way you make decisions tomorrow. Always assume that the CRE ground has moved under your feet.
These may sound like random thoughts that simply emphasize the role of change in CRE. But the reality of this industry is that our job is to support our business today and create a platform for the business to be successful into the future. Our job is to make sure that we provide a solid foundation for our business to operate from.
What does this really mean? It means that no decision we make can be made in a silo. Everything we do impact someone outside of ourselves. If we put the business in the wrong part of the city, they may have difficulty hiring. If we don’t design the office to ensure productivity and flexibility, the business will have a higher cost hurdle to overcome. If we put a 9-year lease in place for a business that is only going to exist in its current form for 3 years, we’ve put a potential 6 year added cost burden on the company. If we sign a 2-year lease on a space that the business expects to operate in for 10 years, we add a risk of moving before the business would like.
Just because we know how to optimize a real estate deal or implement the most modern workplace doesn’t mean those things will work for the business we are supporting. Just because we know all of the market factors (labor, real estate, financial) doesn’t mean that those factors really matter in a particular decision. It simply needs to be about the business.
Real estate is a canvas to be painted on.
It can be easy to think that we need to get everyone rowing in the same direction; that someone dissenting is actively working against us. Most of the time, this isn’t true. We don’t need everyone on the same page as us. Usually, you just need a small group.
In any given group, most people are usually there to just do the job in front of them. They aren’t going to take sides or become evangelists for an idea because it’s not what they were hired to do. They will get their directions and move forward regardless of their personal opinion.
A much smaller part of that same group are the people (often known as leaders) that will care. Some will agree, some will disagree, some will think you are focused on the wrong thing. By definition, you cannot win them all over.
The trick is knowing that you don’t have to. As soon as you have a core group of leaders convinced, you can move forward. That core group will make sure the dissenting (or uncaring leaders) at least won’t actively work against the direction and get the majority of the group pushing in the right direction.
Hardest in this process is identifying the group of leaders you need to work through. The group changes depending on the topic – we all have things that are above our pay grade or outside the list of things we are going to worry about. The number you need to convince will also change given the impact of the decision or how many are directly impacted by it.
But never do you need to actually win everyone over.
All of us are impacted by the decisions of others. When we are children our lives are dictated by the decisions of parents, teachers and other adults. When we first start working, we are pushed by the decisions of managers. As we grow in our careers, we are still impacted by managers but often we also become impacted by the decisions of others outside of our direct line.
In real estate, this particular phenomenon is acutely experienced. If another group decides to grow by 100%, our job is to accommodate it. If HR decides there will be no more work-from-home, we have to ensure we still have enough seats. If a business decides that they need to open internationally, we’re on the frontlines helping find sites.
Our role is not to be directly part of these decisions and often we aren’t even consulted beforehand. These decisions directly impact our daily experience. It can be uncomfortable being at the whims of others that you neither report to or manage.
This discomfort is powerful because it is correct. Working for the decisions of others is more challenging than being fully accountable. At the end, your success is tied to the correctness of the original decision. Consultants and other service providers operate this way at all times. It actually enhances their authority in certain situations while allowing them to play the role of neutral arbitrator.
This discomfort from being driven by the decisions of others puts you in good places. The role of the neutral arbitrator is one of the most powerful in an organization. Yours becomes the voice that justifies and endorses the decisions or nudges them toward greater correctness. Embrace the role and you may find amazing things happen.
A lot of times we can get caught up in financially engineering a lease to save an extra 5 or 10%. This is why we bring in quality brokers that know their markets, landlords, and customs. It is also just good business to negotiate the best lease costs possible and structure it around the best terms possible. But this part of the process is the tail end and happens because it needs to and not because it is actually business critical.
The best real estate decisions shouldn’t need to consider the real estate costs at all. Real estate is a force multiplier. Without it, you can’t do the other business functions that you need in order to grow, thrive, and succeed. If the difference between a good and bad decision is a slight change in NPV then you have lost sight of the strategic objectives.
Is cost an important factor? Of course, once you have decided on the generally correct area and have a full business case put together. But at that point, you know the five or ten buildings that are acceptable to support the case and we just need to optimize cost and design to ensure the most optimal outcome. It’s now trivial because even at the non-lowest cost the decision makes sense.
After the very first decision to locate in a market, then cost becomes the critical factor every decision point after unless there is a reason to reassess the strategic basis of the location. The financial negotiation is important but really a few percent of additional cost against the benefits that real estate allows is almost inconsequential.
Many people believe that an answer with 99% confidence is better than one with only 70% confidence. On the surface, with no additional information, maybe this could make sense. But the world of trade-offs almost always makes the 70% solution better.
Trade-offs occur in every decision. Moving any decision from 70% confidence to 99% requires time and complexity. Time is a non-renewable resource that we can never get back. Delaying a decision to increase confidence can often cost a lot of time and only yield false levels of new confidence. Complexity is similar, the more complexity involved in a decision, the more likely an error exists somewhere in the assumptions.
One of the great lessons I’ve learned in my career is that 70% confidence is often enough to move forward with. Get the next 10/20/30% confidence from real life experience and feedback. If you spend time modeling and trying to get everything perfect for release, key opportunities will pass you by.
The best engineers understand this rule. Poor engineers will strive for 100% and take the time to try and get there. This wastes the time it takes and the additional confidence is often false because of the new complexity. But they now have a thick document to fall back on and defend full of assumptions that they can use to justify any change outside of their expectations.
There’s a principle in decision theory called MECE – Mutually Exclusive and Collectively Exhaustive. It essentially says that when you define your decision criteria that shouldn’t overlap and they should include everything you are going to base your decision on.
For example, you shouldn’t leave finance out of your decision list because “it will take care of itself.” Finance is part of 99% of all major decisions and so should be included. Similarly, finance should only exist in one part of the criteria and not exist in multiple places. You shouldn’t have Total NPV as a criterion and then the cost of a single piece of software in another. You are double-counting the software in that instance.
This is a difficult principle to wrap our heads around, particularly if you’ve never encountered it before. Putting all of our HR related issues into one box and finance related issues into another seems like we are separating topics that go in hand. You can’t have a project that expands workforce without also increasing costs.
The goal of MECE is to enable us to understand the trade-offs that exist when we make decisions. Expanding workforce may be good but is the decision ranking offset by the incremental increase in costs? Without understanding our independent thoughts on additional capacity versus added costs we can’t score that trade-off.
At the same time, if our criteria overlap and include combined topics we’ll never have a clean evaluation framework for making our decision. The goal of decision theory is to assist in making quantitatively supported decisions. A decision framework that doesn’t provide clean scores will naturally keep us in the qualitative realm.
There are certainly problems with MECE. The first being that it isn’t always possible to separate criteria completely. To use a baseball analogy, if you value players that hit homeruns but also players that drive in and score runs you are double counting since a homerun always leads to both an rbi and run as a result. It is very difficult to separate criteria without going down to valuing player specific attributes such as bat speed and reaction time – the data for which is either not available or difficult to work with.
With the election of Donald Trump, I have seen an associated uptick in the number of consultants talking about the increasing need for risk management. Everywhere I look I’m seeing “risk management.”
But talking about risk now is like trying to sell fire insurance after your house has burned down. It may be on top of people’s minds but the right time to talk about risk management is always. But especially prior to surprising events like Brexit and the election of President Trump. Risk management should be part of the everyday playbook in how problems get solved.
Consultants, as a group, are very good about selling for the situation in front of us today or that occurred yesterday. Like clockwork:
- If the stock market takes a hit you will see all kinds of mentions about aligning strategy with EPS and EBITDA.
- If something unexpected happens in the world they will bring up Risk Management.
- If unemployment starts going up they will talk about aligning your workforce to the next three years.
- If a treaty is about to be signed addressing climate change or the cost of carbon you will see them going hard after sustainable initiatives.
Anyone focused on yesterday or today is not really looking out for your best interests – as they say on Wall Street, buy low/sell high! When unemployment is going up they should be talking to you about how you can leverage the opportunity to get new customers. When your earnings are strong, you should be paying even closer attention to aligning strategy with financials.
When everyone thinks the same and acts the same you end up with these recurring cycles that strike everywhere at once. Groupthink is very pervasive and can occur even when you don’t know you are part of the group.