10 Apr Making the Most of All of Your Corporate Assets
The recovery becomes the problem.
The Great Recession of 2008 and the subsequent recovery have created an interesting confluence of events. Many companies held off on making location and other real estate decisions for almost seven years. Now, with increased economic opportunity, these same companies are being forced to make expansion and reconfiguration decisions – Quickly!
A variety of corporate decisions may lead to the initiation of a corporate site selection project. At an operational level, changing real estate needs as a result of a shifting pattern of home and office workers may force the company to reconsider its current real estate portfolio. Shared services or changing supply chains at a tactical level may require a new location footprint of business activities. Strategic decisions, made at the top of the corporate pyramid, such as acquisitions or entering unexplored foreign markets often too end up in cross border site selection projects.
The important question where to operate and which activities to deploy is often driven by urgent and one-dimensional requirements from operational, tactical or business-unit levels, resulting in approaches that only optimize real estate, supply chain or tax effective solutions, exposing the company to other significant risks.
Different language, different mindset, different approaches.
It can be intimidating for real estate managers to stop talking about yields and lease terms and instead argue and weigh in on customs, duties and transfer pricing regulations. For tax directors it may seem odd that operational costs such as utilities, logistics or labor may partly or even completely offset a carefully drafted international corporate tax structure. Moreover, anxiety or even suspicion between different company divisions and departments may hold back on transparent and open communications. To make things worse, hidden agendas or different personal incentives may add to this complexity.
ICA has worked with several clients in this exact situation, including an exciting project throughout the United States to advise and assist a large multinational enterprise (MNE) on rationalizing its real estate portfolio. The company alone holds offices in more than 100 metropolitan areas in North America and Canada, and the idea was to find feasible alternative sites in each of these locations. A careful planning and recalculation of real estate needs resulted in a modified program which was used by a team of site selectors, architects and brokers to explore the market and to conduct the city evaluations. According to our schedule, a full community visit lasted for two days and soon after the engagement was signed, the first results of the community assessments were presented to the corporate real estate division.
So far so good.
After internal discussions with local branches asking questions how they need to cope with size reductions up to 50%, the course of the discussions centered increasingly on the underlying question: which activities remain in the local branches and which activities could be centralized or outsourced. Would it really be necessary to have in-house employees responsible for planning, logistics and supply chain, sourcing, procurement, HR, finance, and accounting at each of these locations? In other words, what would happen to the juridical, tax and fiscal position of these local branches if risk and management functions were to be centralized and nothing else than sales, repair and field services were left behind?
In this case study, the real estate department did not consult their tax and legal colleagues from the early start. Only halfway the project, and as a result of ongoing discussions, the project was introduced to the tax and legal department, after which the project took a drastic change. By not informing the tax and legal experts, this MNE most likely missed out on the additional tax savings and ended up with a sub-optimal solution.
Coming To Consensus
Our experience has led us to approach location decisions very differently. Instead of being a pure real estate or incentive negotiation, each location decision is an expression of a company’s business strategy laid out as points on a map. The company’s locations either enable or thwart everything from talent to innovation to financial exposure. As a result, we work with our clients to make sure that the right people are at the table and the right questions are asked before the project even starts. In this way, our clients – who need to make good, sustainable decisions and do so with an ever-decreasing resource base – can find location solutions that serve their needs now and well into the future.
Chris Steele & Matthijs Weeink