Moving Forward: Capitalizing on What we Know to Reduce Occupancy Costs and Accelerate Your Business Recovery

May 2020

By Ross Forman
 
COVID-19 has accelerated a shift in global workplace strategies that have been brewing for the past several years. The success of the shift has surprised many, even in the traditionally agile culture of technology companies. OpenText, a Canadian based software firm with more than 12,000 employees and 120 offices worldwide, has already announced it is closing half of its locations permanently due to the success of Work-From-Home and reduced need for space. Decisions like OpenText’s can and must be made now. Further validation that the need for space will dramatically be reduced came within the traditionally conservative industry of insurance with Nationwide announcing it will vacate five offices as it shifts to a permanent Work-From-Home Strategy.
 
Too often, what is reported in the media, or discussed within the professional association environment, focuses on all of the areas not known about COVID-19 and its longer-term impacts on the economy.  Discussion centers on areas such as not enough tests and testing being available, inconsistent state government criteria for lifting of restrictions, success of coronavirus treatment and timing of or if a vaccine will be available.
 

What We Do Know

The attention to the unknown has resulted in many organizations being caught in a cycle of indecision. Where the virus forced companies to take certain actions, those have long been implemented. Conflicting advice and opinions shared with companies’ leadership has had the unfortunate result of delaying needed action from what we do know. While there are undoubtedly “unknowns” about the business landscape post-crisis, there are also important updates that can help organizations move beyond uncertainty and towards action. These include:
  • For many businesses, WFH has been a success.
  • Companies have validated that productivity has not taken a sharp downturn as once predicted in certain industries if WFH was widely implemented.
  • Regardless of temporary changes to space to address social distancing at work, the need for square footage will reduce the real estate footprint.
  • Fundamental impacts to the economy are an absolute.
    • Massive increase in unemployment has for practical purposes eliminated the “War for Talent” that existed pre-crisis.
    • Workplace strategy will not be under the same degree of stress to invest in the workplace to attract and retain employees.
    • Gig workforce seems set to continue to expand.
    • Office markets will be negatively impacted for foreseeable future, creating opportunities.
  • There may be a virus rebound.
  • Further headcount reduction is highly likely.
  • Building in flexibility and agility will be prioritized in business decisions and operations.
We can also look to companies at individual levels to see the emerging or accelerated trends. For instance, organizations worldwide are facing difficult decisions with respect to their personnel. Most express a desire to avoid layoffs and refer to the time-tested comment that people are a company’s greatest asset. There is recognition that they would benefit from considering alternatives to wide-scale reductions-in-force thinking ahead towards satisfying a reignited demand while maintaining the quality of the company brand. With occupancy costs typically being the second or third largest expense, there is no better reason to immediately implement an aggressive rent reduction initiative.
 
Additionally, retailers are leading the way in not simply asking for short term rent relief, but restructuring, closing, consolidating, or otherwise reducing real estate related expenses materially. Whether it is out of necessity or capitalizing on market conditions, they are taking bold steps, not incremental changes which only results in a “kick the can down the road” outcome.
 

Addressing Occupancy Cost Concerns with Action

Based on the knowns, a roadmap for companies to utilize in taking immediate steps to reduce occupancy related expenses becomes apparent. Continued delayed actions will cause organizations to lose a competitive advantage and only serve to impede recovery from the pandemic.
 
Companies that want to expedite recovery efforts should utilize the information we have today to begin implementing an action plan. Below are key components of a successful cost reduction plan.
 
Scenario Planning
Comprehensive “what-if” scenario planning should be completed immediately to consider impacts of potential changes, including:
  • Material changes to the makeup of the real estate footprint
  • Reducing the number and sizes of location  
  • Revise geographic makeup (urban versus suburban by way of example)
  • Restructuring of leases
  • Closing of locations
Prioritized Decision Matrix
Organizations should create a decision matrix based on alternative scenarios identified in the scenario planning process. The matrix should prioritize actions to take based the company’s current state and goals. Below is an example.
  • Locations with near term lease locations or lower historical utilization: Terminate immediately
  • Locations in historic high rent markets: Immediately renegotiate to reduce space, lower rent or negotiate lease buyout
    • Will be able to lease back space if required at a much-reduced rate based on market conditions
  • Remote regional/sales offices: Close due to reduced need for space
  • High priority locations: Restructure lease to lower rent terms
Selling, General and Administrative (SG&A) Expense Analysis
Additional cost reduction opportunities can be identified by analyzing SG&A expenses and acting accordingly, such as:
  • Headcount analysis
  • Evaluation of additional occupancy related expenses
  • Updated policies and procedures on controllable expenses
  • Aggressive contract restructures and audits
Failure to act based on what is not known is not a strategy.  Boldly building a robust cost reduction plan that capitalizes on what we know may be the difference between just surviving or truly thriving.
 

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