Own it or Rent it?
Until the 1980s most hotels were owned and operated by the same person or
corporation. Ten, the CFO of Marriott started pushing the idea internally that
Marriott Corp was mainly an operator of hotels and did not need to own the physical
facilities to do what they did best. So, Marriott started selling the physical hotel
properties to individuals, REITs, and other corporate real estate investors for cash
and then entering onto agreements (essentially leases) to manage the properties.
Pretty quickly, Marriott had paid off its debts as it reduced its assets and continued
earning a very nice and rising bottom line income and a truly fabulous return on
assets and return on equity for the equity owners of Marriott. Meanwhile, the
buyers of these properties, with the lease agreement from Marriott Corp as
managers, were able to borrow 80%+ on the value of the land and the physical
assets and, for tax purposes take favorable accelerated depreciation n the
“improvements” to realize a very attractive return and cash flow on their equity
investment. It was a classic win-win. The management company off-loaded a huge
investment in property and paid off their debt (while raising dividends and
acquiring their own stock) and property-specialist private investors and taxadvantaged REITs obtained low-risk properties that they leveraged as incomeproducing real estate investments. Marriott’s actions added enormously to the value
of its equity, and this started a trend within the whole industry of separating
ownership of the properties from the management of hotel properties.
Until the 1980s, a lot of the most prominent brands in the USA were owned by
companies that thought the only way to ensure consistently high quality was to
manufacture all their products themselves. Spalding Sporting Goods was a classic
case in point. For decades since its founding, Spalding produced everything that they
sold. However, Spalding was having a hard time financially. Vertical integration is
extremely hard to manage successfully. There are problems with getting acceptance
on transfer prices between the manufacturing units and the marketing units within
the same organization. Communications and incentives are very complicated. Some
of the facilities were inefficient compared to contemporary production designs. And,
there was a movement toward offshore manufacturing at lower costs, especially to
Asia. A private group bought Spalding and proceeded to close one production facility
after another, contracting with independent producers to make their products to the
Spalding specifications. The one product for which they retained the production was
in golf balls where Spalding thought they had a technology that no one else could
duplicate. They found that others could produce and sell to Spalding more efficiently
and at lower costs than Spalding could do internally. Plus, Spalding could reduce its
orders when the retail market was soft. Plus, if an alternative supplier came up with
a more efficient production system or a better product design, Spalding could adopt
and expand with the innovative supplier. Finally, Spalding had easier flexibility for
sourcing their products offshore to lower their costs. The net result was that
Spalding generated cash from its sales of facilities, reduced costs, improved
flexibility, and focused on being what t did best: Spalding was a branded marketing
company with global capabilities for both sourcing and marketing.
Until the 1980s, an individual could join a successful company and expect, with
diligent work, to remain with that company for his or her entire career. There was
more, then, of a mutual practical loyalty. The company would retrain and educate
and promote the employees that performed best and showed the highest promise
for the long term future. Promote-from-within was a big selling point to attract
employees to the company. And, employees stayed with the company because the
opportunities were best for promotion from within. That mutual attraction has
changed a lot. Now, companies tend to hire to achieve a certain objective with a new
employee, all the way up to the CEO. Training within the company has declined.
Employees are expected to arrive with the credentials to achieve the current
objective. Employment has become short term. It seems there is no such thing as
“permanent employment”. As a partial but growing substitute, more companies are
“outsourcing” employees to fill their needs. An outsourced employee arrives with all
the credentials to focus on and achieve a specialized outcome and then can be let go
with little or no penalty when the task or project is completed. You do not need to
“own” the employee on a permanent basis. Instead, you can bring in the talent that
you need when you need it, and then you can let it go when you no longer need it.
“Temporary help” firms like Randstad, Manpower, and others can now supply up to
professional “C-Suite” level fully competent personnel to do what is needed.
Tatum CFO Partners, LLP (now Tatum, a unit of Randstad at www.Tatum-us.com )
was founded by John and Doug Tatum in the 1990s as a firm to supply temporary
and part-time CFOs to small and medium sized enterprises on a flexible basis.
Companies that are growing rapidly and need “outside” financial capital need a CFO
if only on a part-time basis. Companies considering being acquired or going public
need a CFO who has been there and done that. A decade later the firm had grown to
nearly 1,000 client-facing partners fulfilling the role of CFO (and CIO) or doing
projects for the office of the CFO that required high level, experienced talent.
So, the point is that you do not need to own it to use it to your advantage in business.
Flexibility is crucial especially for small and mid-sized businesses. Owning reduces
flexibility. My advice is, rent it if you can. Decide what you are really good at doing,
and gather and develop the resources needed to be the best at that, and rent the
supporting resources as needed.
SWN 4/9/2014
© 2014