IBM Software
Thought Leadership White Paper
Lease to lifecycle management
Economic and regulatory developments increase the case for real
estate systems integration within retail
May 2012
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Lease to lifecycle management
Contents
2 Question: Does this scenario apply to your retail
organization?
2 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
5 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.
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.
IBM Software
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.
●●
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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.
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Lease to lifecycle management
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.
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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.
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.
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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
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Lease to lifecycle management
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.
Finally, an associated priority with environmental sustainability
is business continuity and disaster recovery. Several recent highprofile 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:
●●
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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.
IBM Software
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-to-day
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 workf lows; 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.
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/software/tivoli/products/ibmtrir
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About the author
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.
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