Lease to lifecycle management. Economic and regulatory developments increase the case for real estate systems integration within retail

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1 Watson Internet of Things Economic and regulatory developments increase the case for real estate systems integration within retail

2 Contents 2 Question: Does this scenario apply to your retail organization? 3 Moving toward a new lease accounting standard 3 Defining the shift to retail store lifecycle management 3 Moving from lease to lifecycle to improve real estate performance 4 Streamlining processes to improve operational performance 4 Integrating performance management to drive increased financial performance 5 Using environmental performance management to increase brand value 6 Conclusion 7 For more information Question: Does this scenario apply to your retail organization? A global specialty retailer faces a crisis in misaligned real estate strategy due to rapidly declining domestic sales; accelerated demand in international markets, particularly in emerging markets; enormous pressure to reduce occupancy and operating costs; and public debate over its environmental performance. The ongoing global economic crises, unprecedented energy prices and increased unemployment have created severe imbalances between consumer demand and store capacity. The retailer must rebalance its store portfolio quickly or face a meltdown in revenues and profits without yielding valuable market share to its closest competitors. Unfortunately, the retailer s ability to bring about improvements remains hampered by its continued utilization of a mixture of disparate software applications and manual processes for its real estate, construction and facility management. The real estate department selects sites using custom spreadsheets developed by a financial analyst no longer at the company. The lease accounting department depends on commercial lease management software that has been sold by a vendor who no longer supports or upgrades it. Design and construction use a combination of software and paper-based files to track new stores and remodels while facility management lacks integration with these groups and dispatches vendors to stores that have closed. Finally, financial data is scattered across all these functions in different formats so real estate management lacks a consolidated view of its real estate operating costs and financial obligations. This scenario, while fictitious, reflects the situation hundreds of retailers now confront. Page 2

3 Moving toward a new lease accounting standard And it is not just economic conditions forcing retailers to change the way they manage their property portfolios. Legislation in particular, new financial reporting standards jointly ushered in by the Financial Accounting Standards Board (FASB) and the Europe-based International Accounting Standards Board (IASB) creates a dramatic impact on the way retailers account for their leased property. Leased real estate and equipment currently classified as operating expenses and therefore not included on the balance sheet will soon join other assets on the balance sheet and impact critical financial-performance figures such as debt-to-equity ratio and return on assets. This move aims to bring about improved accuracy and visibility. But the flip side of such an improvement is an increased pressure on businesses with significant corporate real estate. A major retailer may find itself having to add up to $35 billion of assets and liabilities to its balance sheet and therefore open itself up to new levels of shareholder, creditor and investor scrutiny. Defining the shift to retail store lifecycle management Since 2003, there has been a steady trend by progressive retailers to move away from point solutions such as market analysis and planning tools, lease management applications, project management tools and stand-alone maintenance systems toward store lifecycle management functionality, which is the hallmark of integrated workplace management systems (IWMS). Unlike point solutions, these systems provide a single web-based software application that delivers seamless predefined integration of all the various processes to manage the entire real estate lifecycle. Retailers that have made this shift realize measurable benefits from a number of perspectives: Integrated processes across the real estate lifecycle improve employee and service provider productivity, reduce capital and operating costs, and improve quality of real estate assets and operations. A lifecycle management system provides a single source of truth relative to real estate assets and operations and includes embedded performance measures that evaluate and identify underperforming locations, resources and processes from which to improve real estate performance. A lifecycle management system provides a single technology platform that consolidates business systems and technology platforms to reduce the total systems licensing and maintenance cost. As the scenario above suggests, there is now a new urgency for laggards in the retail industry to convert to lifecycle management systems, as typified by IWMS software, or risk adverse operational and financial consequences. Moving from lease to lifecycle to improve real estate performance Traditionally, retailers utilize disparate point solutions to manage various aspects of the store lifecycle process. For example, a retailer may use home-grown software to evaluate different store location alternatives, analyze market dynamics, demographics, real estate market parameters and operating costs, while using commercial software to manage the lease administration function. In another example, the retailer s real estate design and construction function may use separate commercial software products to manage project scheduling, budgeting and cost management. Page 3

4 In each case, the system solutions require duplicate manual entry of data and therefore increase the potential for data errors. Such duplication of effort can lead to protracted schedules and store-opening delays that reduce retail revenue weeks, increase expenses and erode confidence in regulatory compliance reporting. In contrast to the detrimental impacts of this disjointed approach, the shift to a lifecycle management system provides retailers with three key areas of value. These include improved operational performance, increased financial performance and enhanced environmental performance. Streamlining processes to improve operational performance The key to effective store lifecycle management centers heavily on efficient, carefully designed and automated processes that are then embedded in an integrated system. Such a system ties together critical lifecycle processes into a coherent and integrated set of predefined workflows that streamline the collection of information, improve decision support, accelerate approvals and automate hand-offs of work products from each step in the lifecycle process. As an example, imagine a lease document that is routed for review by real estate legal, lease accounting, finance and real estate executives, each step guided by the integrated system, vastly improving the vetting and review process. Core capabilities such as critical path scheduling in the real estate site selection and construction phases focus efforts on activities and tasks that affect store openings and increase revenue weeks. A consolidated schedule increases alignment of store open dates with marketing and store operations functions to accelerate revenues. Acquisition and build-out cycles that required six to eight months now can be done in four months or less. Integrated payment processes, such as payment reconciliation and percentage rent reporting, drive enormous savings in real estate operating costs through embedded logic that reconciles legal clauses within real estate contracts against payment demands to reduce overpayments. Embedded payment reconciliation processes, such as Common Area Maintenance (CAM) reconciliation, automatically aggregate escrowed payments, negotiated payment caps and submitted payment demands to determine and alert on overcharges. Automated percentage rent payment processes ensure compliance with legal terms of negotiated leases. In parallel with enhanced operational processes, a lifecycle management system significantly enhances the organization s ability to meet various regulatory and compliance requirements. For example, joint IASB and FASB requirements for reporting of lease assets and liabilities within a retailer s annual reports can be accurately reported within the IWMS reporting capability. This systematic and standardized approach to real estate processes significantly enhances coordination of internal real estate, project management and facility management functions with external landlords, consultants, contractors and service providers. This approach results in more efficient use of human resources, data sharing and seamless hand-offs at each step in the lifecycle process. Integrating performance management to drive increased financial performance Performance management aligns retailers business and real estate strategies. Performance management benchmarks various aspects of the store lifecycle process against internal and external metrics, such as acquisition costs relative to industry averages, project schedule performance and customer satisfaction metrics to determine underperforming stores, resources and processes. Page 4

5 For example, a retailer s business strategy may emphasize enhanced access to emerging retail markets. Thus, the real estate strategy includes site selection criteria that evaluate international market demographics and proximity to major transportation arteries. These criteria form the basis for performance metrics that track and measure how well store acquisitions meet or exceed location criteria. Predefined performance measures provide visibility and management insight into the entire retail portfolio and across the complete real estate lifecycle. This, in turn, identifies excessive costs, inefficient payment and operational processes, and unproductive resources. Role-based metrics provide a balanced scorecard of financial, portfolio, operational, customer and environmental performance to communicate individual performance up and down the organization so that management and individuals can take corrective action in a timely fashion. Financial performance is enhanced through lifecycle systems when operational cycle times are reduced, resource productivity is increased, real estate strategies are aligned with core business objectives and excessive costs are removed. Using environmental performance management to increase brand value Environmental performance has risen to become a top priority for retail management. Going green is the new mantra, and retailers are now compelled to demonstrate leadership in environmental sustainability, both in terms of financial performance and in terms of their brand equity. Ninety-seven percent of retailers have established an energy and environmental strategy, according to an IBM study. 1 The study reveals that the top drivers of green retail initiatives are improved energy efficiency (68 percent), reduced operational waste (65 percent) and improved resource management in procurement and/or supply chain (53 percent). According to the US Energy Information Administration, buildings account for a staggering 49 percent of total energy consumption, of which 76 percent is consumed by building operations. 2 Therefore, improved environmental performance requires the commitment and action of executives across the entire real estate lifecycle. In order to achieve environmental sustainability goals, retailers require a portfolio view of their environmental performance. IWMS functionality provides predefined logs and performance metrics to benchmark each store against preset environmental targets. Metrics based on energy and water consumption, waste and emissions production provide a benchmark of performance used to identify underperforming stores and equipment and to calculate a retailer s carbon footprint. Additional capabilities allow retailers to evaluate sites relative to the USGBC Leadership in Energy and Environmental Design (LEED) Green Building Rating System certification. Once underperforming locations are identified, embedded analytical models within the IWMS systems evaluate the economic and environmental impacts of various sustainability strategies, such as the use of renewable energy sources and capital equipment replacement to optimize investments and reduce environmental impacts. Another key component of a successful environmental sustainability program is improved energy efficiency. IWMS systems improve the energy efficiency of stores and critical building systems such as heating, ventilation and air conditioning (HVAC) units through automated preventive maintenance processes. In the same way that your car consumes more gas when it is not maintained, the HVAC systems that heat and cool buildings require routine maintenance to continue to operate efficiently. Page 5

6 Finally, an associated priority with environmental sustainability is business continuity and disaster recovery. Several recent high-profile incidents serve to illustrate the critical need for retailers to establish contingency plans in the event of a disruption to store operations. The IWMS lifecycle system provides the ideal solution set to create such contingencies and then activate these plans in the event of a disaster. For example, the system identifies alternative distribution points for inventory staging and delivery to backup store locations or to set in motion processes to alert and redeploy store staff, service providers and trucking contractors. Conclusion Today, the retail industry faces daunting challenges as a result of current uncertain economic conditions, conflicting market influences and changes to financial reporting standards. Retailers experience such opposing challenges as: Balancing the wane of domestic consumer demand with aggressive demand in emerging international markets Dealing with the adverse impact that decreased consumer spending has on revenues, while facing an unprecedented rise in energy costs, which affects electrical rates, transportation costs and construction commodity prices Lacking available credit to grow and improve business operations, while facing intensifying customer and investor pressure to improve environmental performance Traditional point solutions utilized in the various phases of the real estate lifecycle are no longer adequate to meet these challenges. Progressive retailers have shifted to integrated lifecycle systems enabled by IWMS such as the solutions offered by IBM TRIRIGA to seamlessly integrate all phases of the real estate lifecycle process, from market planning, through site selection, store design and construction, to day-today operations such as lease administration and facility management. The IBM TRIRIGA store lifecycle management system, as defined by IWMS, drives a three-point value proposition of improved operational, financial and environmental performance. Each phase of the store lifecycle benefits from a single technology platform and database repository; automated process workflows; prebuilt performance metrics; and environmental and energy management functionality that together evaluate and reduce environmental impacts. Retail management worldwide will be compelled to follow the lead of retailers who replace point solutions such as leasing systems with fully integrated store lifecycle management systems or risk competitive disadvantage and lackluster if not disastrous operational, financial and environmental performance. Page 6

7 For more information To learn more about the IBM TRIRIGA store lifecycle management system, please contact your IBM representative or IBM Business Partner, or visit ibm.com/us-en/marketplace/ibm-tririga Additionally, IBM Global Financing provides numerous payment options to help you acquire the technology you need to grow your business. We provide full lifecycle management of IT products and services, from acquisition to disposition. For more information, visit: ibm.com/financing Footnotes 1. IBM, analysis of unpublished retail sector data from Crossing the sustainability chasm study, Problem: The Building Sector. Architecture 2030, Available from the_problem/buildings_problem_why; Internet. Accessed 16 April About the authors Michael Bell is founder and president of Michael Bell Consulting LLC, which focuses on integrated workplace management, systems product evaluation and selection, data center facilities topics, telework and strategic issues associated with the convergence of CRE and IT management. For nine years, Mr. Bell was a research vice president at Gartner Inc., the world s leading IT research and advisory company, where he was part of the IT Infrastructure and Operations unit. Prior to joining Gartner, Mr. Bell worked for 30 years in operations and corporate real estate and held executive positions at Xerox, Dun and Bradstreet and PricewaterhouseCoopers with a focus on the intersection of IT and the workplace. In the mid 1990s, Mr. Bell was president of the IDRC, the forerunner to CoreNet Global. Page 7

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