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Daily Briefings
Monday, March 15, 2004
OPENING GENERAL SESSION Welcome and Opening Remarks – IAMC Chair Bob Zane, Campbell Soup Co. Zane Delivers ‘State of the State’
in Opening Remarks at Tucson Forum
IAMC Chair Bob Zane, group director of corporate real estate operations for Campbell Soup Co., welcomed a ballroom full of enthusiastic members to the Spring 2004 Forum in Tucson with an equally enthusiastic assessment of where IAMC has been
and where it's going.
Noting positive growth in both financial revenues and membership numbers, Zane made special mention of the prominence of corporate members in the organization and the importance of their active participation ("we almost insist upon it") in driving IAMC's programming and value. Proof of that value is evident, he said, in the presence of some 60 percent of the entire corporate active membership at this Forum. It's also evident in Forum sponsorship levels: 24 sponsors are achieving high visibility in Tucson, and 18 have already signed up for the IAMC Fall '04 Forum in Memphis, Tenn. Adding to IAMC value in the near future will be regional chapter development, with the first regional headquarters slated to take shape in Chicago, Philadelphia, Atlanta and Dallas. Also welcoming attendees to Tucson was the city's Vice Mayor Fred Ronstadt, who asked everyone to remind their homebound constituents that perfect weather is his city's year-round calling card. Citing recent positive developments throughout the community, he forecast great things ahead for Tucson. "You'll see a lot of positive changes in the community over the next five years," he told the IAMC audience. From the palpable momentum in the air at the Tucson Forum, the IAMC community shared his outlook. — Adam Bruns
OPENING GENERAL SESSION “Applying the Balanced Scorecard to Corporate Asset Management Groups” – Dr. Robert Kaplan, Harvard Business School Kaplan Kicks Off IAMC Forum
"If you want to find out about organizations," Kaplan said, "don't listen to strategy statements. Find out what they use to measure performance." Tailoring his comments to his corporate real estate, service provider and economic development audience, Kaplan proceeded to describe how asset management can go beyond "cheap space" where we can "pack things together." Instead, it can incorporate all the intangible assets that a corporation and its business units bring to the table, things like social processes and a culture of innovation. While his latest book, co-authored with David P. Norton, is called Strategy Maps, Kaplan also was quick to point out that "strategy is implemented by people, not by strategy maps." Foremost among those people are, of course, top executives. And they're also often the hardest to mobilize toward the Balanced Scorecard approach. But once they're leading the charge, the first results often are evident in as little as six months, said Kaplan, citing success at such organizations as Cigna, AT&T Canada and Mobil. Total rollout, however, takes about two years. One organization Kaplan's concepts have aided is the U.S. Dept. of Commerce's Economic Development Agency, which he described as "moribund" when the call went out for the Balanced Scorecard approach. Within two years, the adjective had been transformed to "vibrant," and the organization was one of the few federal agencies in 2003 to see a budget increase. Meanwhile, the U.S. Army is currently implementing some 500 separate Scorecards. Even in realms like construction – where the three important parameters are "price, price and price," Kaplan joked – a shift to a customer relationship strategy that incorporates such disciplines as project management and R&D can reap more stable and long-term benefits for the service provider and the corporate client alike. After all, he pointed out, "the Yugo was the lowest-cost car produced in the 1980s, but it started to break down as you drove it off the parking lot." Another benefit of adopting the Scorecard is the elimination of initiatives. "Often, up to 30 percent of them are not strategically aligned," said Kaplan. Thus, corporate real estate executives and their c-suite colleagues are able to re-think their often lengthy list of programs at the same time they're re-thinking their property portfolios. That emphasis on thought is at the core of what the Scorecard can do for companies. "It's not a systems project," Kaplan noted in answer to a question from the audience. "It's a thinking project ... a mindset project." Like the baseball fan measuring the intricacies of the American pastime, the corporate practitioner of Balanced Scorecard keeping can use true measurement to gain a new depth of knowledge and appreciation ... and in the process, keep his favorite team ahead of the game. For more on the Balanced Scorecard Collaborative, go to www.bscol.com Among the customized parts of Kaplan's IAMC presentation was a viable Strategy Map template for the corporate real estate/facilities management field. Look for this document, as well as his full presentation, on the IAMC Web site (www.iamc.org) by the end of March. — Adam Bruns
LUNCHEON PROGRAM “The Coming Economic Boom – Implications for the Economy and Financial Markets” – Dr. Robert Genetski, Economist and Financial Consultant Economist Genetski Offers Classically Upbeat Outlook
On tax cuts, Genetski points to the dramatic reduction in capital gains tax rates and income tax cuts over the past two decades as drivers of economic growth. But they could go lower, he maintains. "Look at the Bible," Genetski pointed out. "Even God doesn't want us to give him more than 10 percent of our income," he quipped. Tax cuts enacted by the current Administration will contribute to "the current economic recovery being one of the strongest, most sustainable recoveries ever," he noted. A wild card in the still-unfolding recovery scenario is the threat of terrorism. But bringing the war to Iraq and Afghanistan and removing the bases from which terrorists operate has reduced that threat considerably. Genetski also was optimistic where the manufacturing sector is concerned. A relatively weak U.S. dollar and steady economic growth bode well for the sector for the next year. Interest and exchange rates are likely to remain low during that period, after which Genetski anticipates a 2-to-3-percent rise in interest rates. — Mark Arend
WORKSHOP M1 “Various Construction Approaches” – Kimberly Meincke, Opus East;
Phil Zmuda, Dana Corp.; Wilma Warshak, Colliers International; Jennifer Lantz, Wilson (N.C.) Economic Development Council (EDC); David Hirsch, Masco Corp. IAMC Workshop Limns Broad Range
of Facility Construction Strategies
What's the best strategy to pursue in building a new facility? That, as a workshop session at the Industrial Asset Management Council's Spring Forum underscored, depends on a broad range of important factors, not the least of them being costs, speed and corporate fiscal needs.
The March 15th workshop, "Various Construction Approaches," brought a wide range of options to the fore at IAMC's record-setting Forum in Tucson, Ariz. Kimberly Meincke, director of national business development for Opus East, kicked off the session with a look at for-profit design/build. Design/build offers a number of advantages, said Meincke, including one-source responsibility for all project aspects; "cost savings and early knowledge of costs;" time savings; "innovation, collaboration and add-on services;" quality; and a reduction in client firms' administrative burdens. "With design/build, you have one entity that's fully accountable for delivering the entire project," she explained. "There's no finger-pointing among the various players." Meincke said that design/build "won't be the lowest bid. But it provides realistic costs estimates, with less painful corrections. And it keeps the project on track, which is your end goal." She cited Penn State University research indicating that design/build reduces a project's time frame by 20 to 30 percent. Much of those time savings come through allowing contract execution and construction to begin before final drawings are complete. And time savings can translate into major money savings, Meincke added. She cited the example of a $15-million construction loan at 8-percent interest. With such a scenario, a design/build project might save $395,000 by finishing work in 12 months versus 16 months for a design/bid/build project. Dana Corp.: '90 Percent of Our
Next up was Phil Zmuda, senior manager of real estate transactions for Dana Corp., who made an equally strong case for the in-house side of the equation.
Value is Pre-Construction Management' Dana's Asset Management Group, which includes both corporate real estate and construction services, handles a number of functions, Zmuda explained, including project management and owner representation, construction administration, pre-construction management, and construction management. "Ninety percent of our value is in pre-construction management," he explained. "It's much easier to erase and revise figures than it is to move concrete." One major area of savings stems from "the detailed scope of our work-contract documents," added Zmuda. "That minimizes changes." Another major expense-cutter is in the major reductions in third-party fees and claims through full-service construction management, Zmuda said. "That produces a significant savings for Dana of from 8 to 15 percent," he explained. The Dana executive profiled two projects that underscored those strengths. One was a 120,000-sq.-ft. (10,800-sq.-m.) facility to machine and assemble axles for BMW vehicles. The company picked Orangeburg, S.C., in part because the area offered the kind of greenfield site for which the company was looking. Pre-construction services provided 90 percent of the project's savings. The other project Zmuda described was an engineering consolidation in Toledo, Ohio, which was picked over sites in Indiana and Michigan. Dana built the facility and then leased it from the Toledo Port Authority. The company saved $2.75 million on the Toledo facility, Zmuda explained, with 70 percent of that amount coming through pre-construction services and 30 percent through construction services. "With full-service construction management, we build for quality and schedule instead of profit," Zmuda noted. 'Real Estate Managers Often
Wilma Warshak, senior vice president of Colliers International, then described some of the problems and issues that her company encounters in building construction.
Not Included in Strategic Meetings' "The end user often doesn't have a clue about real estate," she said. "And they often don't include the real estate direction in strategic meetings." Another recurrent issue, added Warshak, is major differences in what companies want to do with a facility when the time comes to dispose of it. "The biggest profit comes from when it's sold," she said. "So a lot of corporate asset managers are beginning to engage in arbitrage. "On the other hand, some companies are worried about cash flow, so we build it cheap and then it's sold at cost" A Private Nonprofit Does Build-to-Suits
Jennifer Lantz, executive director of the Wilson (N.C.) Economic Development Council (EDC), described an innovative tack in Tucson: build-to-suit by a private nonprofit corporation.
"We build state-of-the-art facilities to entice companies to move to Wilson," she said. Lantz emphasized that some tools are absolutely necessary to be able to talk with credibility to prospects. Among them, she said, are basic building specifications (whether purchased or developed) that "can readily be used in talking with companies;" sample leases, lease-purchase and purchase contracts; and financing contracts and documents that are drafted in conjunction with banks. "If you don't do those things," said Lantz, "people will never believe that you're legitimate." The Wilson EDC is careful, she said, to "determine the suitability of the companies. This option doesn't work for every company." The group also researches companies' financial stability and determines if a build-to-suit enhances a firm's goals in creating a new facility. "We spend a lot of time up front determining what the companies really want," Lantz explained, "and we select construction partners very carefully, since we'll be held responsible." The Wilson EDC also writes in a "no change-order policy," she added. "We know that you're not going to get away with it, but we put it in there, and it does reduce changes. Typically, we have only four or five changes per project." Companies that have the EDC do a build-to-suit realize a number of benefits, she said. Among the major advantages for those firms, Lantz explained, is being able to locate in a new facility without allocating capital (the loans are non-recourse); reducing the company's man-hours in building the facility; and "assuring them that the community will be a long-term partner." Masco's Balanced Scorecard Adds
David Hirsch, Masco Corp. director of property management, described his firm's very broad and pro-active approach to in-house facility construction.
Major Value, but 'Creates a Lot of Pressure' The only function that's fully outsourced is site selection "because we want to retain our confidentiality in the early stages of a project," he said. The company's real estate arm handles a wide array of functions, said Hirsch. Those diverse activities, he explained, include working with client business units on major issues like construction costs and appropriate facility types, incentives, land acquisition, hiring the project architect and civil engineer, and bidding out the entire job through the general contractor. Masco's real estate arm, however, makes sure that the services it's offering are the most cost-effective option. Before work is done in-house, it's also put out for bid to three or four outside service providers. "We make sure that we benchmark our work - that's very important" Hirsch explained. "If we don't think that we can beat the outside provider's numbers, then we outsource it to them." That's rarely the case, though. Masco's in-house real estate and construction costs average 15 to 20 percent lower than those of outside bidders, Hirsch said. The in-house forces realize some of those savings by using fixed-price contracts with architects and engineers. Hirsch's team also uses the "Balanced Scorecard" approach described in the morning's opening General Session by Robert Kaplan (see report elsewhere in our daily briefings). "That brings all the members of the team into the process, because each then knows exactly what they did to enhance shareholder value," Hirsch explained. "You've got to remember, though, that once you do that, the company expects those sorts of savings every year. There's a lot of pressure." — Jack Lyne
WORKSHOP M2 “Meeting the Bottom Line: Are You a Player?” – David Cotts, Ed Rondeau
"Understand your cost of doing business. That's the most important point of this presentation," said David Cotts to the corporate real estate executives, service providers and economic developers in a workshop audience of about 50 at the final session of the day in Tucson. The program, entitled "Meeting the Bottom Line: Are You a Player?", also featured Ed Rondeau, co-author, with Cotts, of The Facility Manager's Guide to Finance and Budgeting, on which the presentation was based.
Cotts made the strong point that "If you're not focused on cost reduction, you're not going to be there very long." He said corporate real estate is a cost center, in spite of past efforts to operate it as a profit center. So, its successful management hinges on "knowing what the costs of doing business are" and developing processes for managing them. Cotts and Rondeau made the following key points: • Focus on the costs for the few functions that have the greatest impact on the corporate The presenters' book is available on Amazon.com. — Joel Parker
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