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Alternate officing: pros and cons of the revolutionary new corporate concept

New Technology suggests that offices are now able to reduce space needs, thus cutting costs. But are the suggested methods actually more efficient? And for whom are they most effective?

Corporate America's attempt to become a more efficient user of office space has led to the introduction of a number of radical changes in the way employees are assigned their block of company real estate. individual offices are out, while communal areas and shared workstations are in.

The overall principle behind the changes is not only a better use of office space but also a way to reduce expenses. While many of these changes have not yet even made it into the mainstream of Corporate America, there is already an undercurrent of doubt in the real estate industry that these new ideas are the panacea some make them out to be.

For the most part, efficient use of space, no matter what the exotic label that is applied to it -- hoteling, virtual office, etc. -- basically comes down to a few main tenets: reducing space dedicated to a single user, moving the work space out of the office and into the home, sharing of existing space and creating communal areas for team building.

The underpinning of almost all space changes comes through improved technologies that have made it possible for work that was once performed in the office now to be done in the home, at the client's office or even on the road. Obviously these technologies include the laptop computer, mobile phone, mobile fax, e-mail services and a wide range of other high-tech and communication devices.

The changes began in the late 1980s and early 1990s when companies began to move away from large offices, opulent space and tenants spending incredibly high dollar amounts on improvements. At the same time, Corporate America also began looking for ways to improve efficiencies in work production. Virtual office, team office and similar concepts are extensions of this search to become more efficient from a space utilization standpoint.

Efficiency is a primary concern

Since space needs are the second most costly expense item on the corporate balance sheet after personnel, companies have been looking not only to find better ways to use office space, but also to save money while doing it.

By reducing space needs through the use of alternative officing, Ernst & Young will save $20 million this year, while some of the major corporations like IBM, General Electric and Kodak estimate they will save $150 million over several years, reports John Carpenter, president of the Pacific Northwest Region for Grubb & Ellis.

The cost savings are coming from a decrease in the amount of office space under lease or ownership. Companies like IBM have figured out that much of its sale force is on the road, where it should be, and not in an office. So, why does the sales force need an office for the few times a month it is actually at the home base? Well, it doesn't. Through the use of laptops and mobile communication equipment the sales force can do the work normally done in the office from an outside location.

"Technology changes and productivity emphasis are the driving forces behind the ability to effectively use less contracted office space," says Robert Palffy, managing partner of Tanguay-Burke-Stratton in Chicago.

According to Telecommuting Works, a Morton Grove, Ill., consulting firm, approximately 8.8 million people regularly telecommute to work, an increase of 16% over 1993. Last year, AT&T participated in Telecommuting Day which was offered to the company's 123,000 managers and non-union workers.

MCI is now testing alternative office concepts for sales staff at its facilities in Boston, Maryland and Denver. Basically, MCI is working with a concept it calls docking stations, where the sales staff, for the few times a month it might be in the office, just "docks in," meaning they plug into an available workstation, get their E-mails, files and go to work as if they were never away.

"Basically, the sales staff should be out on the road selling," says Anne Clemente, facility supervisor at MCI in Newark. "A laptop, portable phone and beeper is really all they need to do their work."

Other companies are also researching and mulling over the efficacy of alternative officing. Dan Pennacchio, director of corporate property management for Pitney-Bowes in Stamford, Conn., says his company, which is building a new office complex in Shelton, Conn., is at this time not designing anything radical in the way of alternative office space, but such things as hoteling for the sales staff, "is certainly a concept that we ought to be looking at."

Hoteling uses an administrative coordinator, sometimes called a concierge like in a hotel. The employee calls the coordinator to reserve an office, then when he arrives everything is set up for him to work: the desk is the right height, the chair is the right chair and the file cabinet is next to the desk. It's just like a regular office, with the only difference being next week it's someone else's office.

Companies are also considering "free offices," where an outside employee who comes to the home office simply uses a space that is not being utilized. Some companies are using remote work centers, which are located near a cluster of offices. It's a place where people in the field can shoot in, do desk work for a few hours, hold meetings or collect messages.

Again, all these concepts are based on the bulk of employee work being done through telecommuting, which is basically calling in from a remote location.

"By providing better tools for advanced productivity, business is moving away from the status-conscious environment of traditional office spaces," says Tanguay-Burke-Stratton's Palffy.

While that may be true, the use of alternative office space is not a universal response to every company's need to reduce real estate costs. Due to the make-up of personnel structures, it just might not be the solution. For example, while it seems telecommuting works for salespeople, it does not work for those involved in the manufacturing process.

In addition, the jury is still out on the efficiency benefits and the costs involved in making such changes.

"It sounds real good, but you have to make sure you look closely so you get the savings you think you are going to get," says Mike Hewson, manager of UPS Properties Inc. in Atlanta. "If you have to put telephone lines and fax machines in people's houses and cars and then if they still have to have the same things when they go to work, the savings may not be there."

A national study conducted by the Massachusetts Institute of Technology Center for Real Estate reports, while technological change makes it possible for some workers to share offices or operate out of their homes, the home/work environment fosters reduced or limited productivity as well as a sense of corporate identity and culture.

"The real question is: from a psychological standpoint, how important is a home base in creating a corporate culture and to what extent does a company define itself internally?" says Alexander P. Jinishian, senior managing director of Williams Real Estate Co., Manhattan.

One of the implications of alternative officing is human resources, notes Peter Roberts, a senior vice president at LaSalle Partners in Chicago. Some of the teams that have been put together to address issues like this include a nutritionist and sociologist, says Roberts. Why? Because when you talk about virtual officing, it is human nature that when one works in-home, a person makes more trips to the refrigerator. Also, the sociologist is used to help reincorporate people who feel left out of the community of workers, as well as to help define a role within the family, which has a different set of expectations now that the worker is in the home more.

Office changes are due in part to the evolution of technology that allows a person the freedom to carry on normal business activities without physically being in the office, but there are different levels of proficiency with these new technological tools and people have different comfort levels in using them. As a result some employees have adapted well, others haven't.

Studies show 15% to 20% of office personnel can be moved over to some form of telecommuting, and perhaps with even better technological advances that number can improve to 30% to 40%.

While technology may be the biggest drive of change, the psychology of the employee could be the biggest impediment. "I question as to whether much of our labor force is really capable of self-administering," says Jerome E. Mathews, national president of the Society of Industrial & Office Realtors, and president of Kidder Mathews Segner in Seattle. "You have to have a fairly mature, responsible work force. Some people can't handle responsibility without some sort of accountability or supervision."

Mixed results lead to greater questions

At this point in time, alternative office concepts have met with somewhat mixed results, observes Pat Flynn, a principal in the Los Angeles office of Coopers & Lybrand. "It's a huge change in culture. It requires changes in work habits, support tools and the addition of organizational support."

Flynn adds that some people are having a hard time adapting because these concepts keep evolving as they go along.

Probably the biggest question when it comes to alternative officing is how well it adapts to different types of industries and office environments.

"It seems to have a fit more for the corporations that have a sales staff or a staff that is in the field more often. Those are the kinds of companies that can more reality provide space on an as-needed basis," says Mark Hoewing, executive director of the International Association of Corporate Real Estate Executives in West Palm Beach, Fla. Alternative officing is something corporate real estate executives

want to know more about, Hoewing adds, "but I don't see it as having as dramatic an impact as things like out, sourcing."

"Companies considering alternative officing need to ask themselves how much individual interaction is needed," states Jinishian of Williams Real Estate. For the service industry, he says, alternative officing has a practical application. "It would not apply to most real estate companies that can function by utilizing local resources."

The Ceridian Corp. is one company that has looked into alternative officing, but decided to stick with its current space utilization methodology. "We looked at it across the board for several groups and really concluded that culturally and businesswise it didn't seem to work for us," says Gary Buesgens, director of corporate real estate at Ceridian in Minneapolis.

Some of the alternative office concepts like hoteling look more appealing than they are practical, Buesgens says. "It was never clear to me what cost savings would really occur. Even in talking to some firms that initialized this, there was a point where you really had to take a long view for some of these benefits to be realized."

Some of the first companies to adopt alternative officing were the accounting firms like Ernst & Young and Arthur Andersen, but Coopers & Lybrand's Flynn says there are potential problems with the industry because of the cyclical nature of the business. There's a busy six months when auditors and those in the tax service department are out of the office daily, but there are six months of the year when they are mostly in the office. Alternative officing is not successful in firms where the business is cyclical, Flynn says.

"Alternative officing looks attractive because it allows a company to reduce its occupancy cost per person, but I think it is still a concept in its infancy," says Williams' Jinishian. "The real issue companies need to figure out is how to plan for maximum space utilization."

American Express Financial Services, formerly IDS Financial Services Inc., in Minneapolis decided against telecommuting because, in a survey of its customers, the company realized more of them prefer to come to the offices than otherwise. "We would prefer to have the customer be a happy customer and come to see us," says Robert Gilbert, vice president of real estate for IDS. However, IDS did change its floor layout.

The ratio of office space to open space at IDS in Minneapolis is roughly 20% to 80%, which fits right into the corporate average of 15% to 30% for office. That will not change, but the company did increase the number of conference rooms from two large units to six to eight smaller rooms. "What we are trying to do is get more team configurations, more opportunities for people to meet," explains Gilbert.

LaSalle's Roberts claims a very high percentage of private offices are swinging in the direction of open-plan floor-plates or modular configurations. "Space alterations are done to support the business objective of being more responsive. The environment can support quicker response time strategies, open communications and working in teams."

Perhaps the biggest question with corporate real estate executives in regards to alternative officing is how will it affect long-term space needs and costs. Michael Sivewright, leasing director in the Chicago regional office of Compass Management & Leasing, makes the case that alternative officing will immediately cause a company to require less space, but following that, as the company becomes efficient and more profitable, it will re-invest in growth. "It will become a stronger company because of the efficiencies it has built in."

On the other hand, Sivewright says, becoming more efficient will result in the higher use of technology which means greater use of electrical capacity requirements and HVAC. Those kinds of demands can only be met by more modem buildings. Older buildings of the Class-C and some of the Class-B variety will become obsolete because they will not be able to provide the office environment that is required for these new concepts.

The "NACORE Index," a survey of 100 corporate real estate executives from representative industries and geographic regions, predicts an increase in corporate use of office and distribution space during the second quarter of 1995. Conducted by the International Association of Corporate Real Estate Executives (NACORE), the "Index" is a quarterly survey to identify trends in space utilization, outsourcing and overall corporate real estate activity. Participants in the survey are in a control group of 100 corporate real estate executives who have agreed to offer regular insights into the immediate future plans of their corporations. Using a ratio of 1.0 = no change, the "NACORE 100" was asked to provide input on three areas of corporate real estate activity. Areas receiving higher than a 1.0 indicate increased activity; those with less than that number project a decrease.

In the second quarter 1995 survey, the barometer of space utilization shows a trend toward increasing usage in both office and distribution sectors, while retail, research and manufacturing figures indicate declining use. While office and distribution show trends in favor of increasing, it is only the distribution and retail sectors that have move respondents predicting their companies will add space than those who say they will reduce. The responses are as follows:

Next QuarterLast Quarter Retail 1.52.25 Research.551.4 Manufacturing.62.65 Office .88.60 Distribution1.5.55

1.0 = no change

The overall corporate real estate activity index, indicating activity of any kind, also shows a large increase jumping from 1.7 to 2.8. Likewise, the outsourcing index, projecting usage of outside service providers, increased from .61 to .76, indicating that more companies are keeping functions in-house than are outsourcing their functions.

Corporate property decisions continue to be increasingly complex, with corporations expecting more than just a quick fix from their real estate consultants. More frequently, the focus is on a long-term strategic approach to asset management and workout issues.

These trends have prompted Jones Lang Wootton USA to beef up its corporate real estate services capability, re-establishing a Chicago office in mid-1994 that focuses on this service area, and promoting Helen R. Arnold to managing director at its New York headquarters office.

Arnold, who specializes in corporate real estate services and institutional investment strategy, is one of eight managing directors at the real estate services firm and the first woman in the company's U.S. operation to reach this top management level.

"Arnold's promotion is a reflection on the value clients place on taking a strategic approach to both investor and user portfolios. They want to understand how future trends may affect their real estate, and they need more than a broker who may be concerned only with the best deal for today," states Denis Kavanagh, managing director in charge of corporate real estate services at JLW.

"More and more, corporate clients are asking the right questions," Arnold says. "Downsizing has brought to them a whole new set of problems, which necessitates our using cutting-edge academic and forecasting techniques to solve their real estate problems. Portfolio restructuring requires the right mix of conservatism for today and flexibility for tomorrow."

Specifically, Arnold applies economic, political and scientific techniques as well as survey research to create forecasting methodologies that can be applied to property decisions. Traditionally these forecasting methods have been found more in financial markets than in real estate circles, Arnold says. She has pioneered an approach using risk analysis to study corporate occupancy costs to determine how cost risk is affected by real estate market fluctuations. "Corporations want decreasing or stable occupancy costs. Determining the direction of these costs facilitates corporate decision making as to whether to own or lease space, she says.

Some of the corporate clients tat have benefitted from Arnold's forecasting are AT&T, Proctor & Gamble, Kraft General Foods, Digital Equipment Corp., ITT and Battery Park City Authority, New York, for which she completed a revenue forecast for a public bond issue.

Arnold has also developed the subspecialties of determining alternative uses for surplus and obsolete properties, with special focus on the industrial, high-tech and research space sectors as well as the unique complexities inherent to waterfront property.

"Waterfront properties often entail a horrible raft of problems and patchwork of regulations," Arnold says, mentioning the historical, legal and regulatory issues that are usually coupled with multiple levels of bureaucracy and extensive water usage restrictions. "Each waterfront property is its own case and often requires massive amounts of research to determine usage," she says.

Besides increasing its investment in corporate real estate services, Jones Lan Wootton relies on teamwork to help solve problems for corporations, Arnold states. "Our multidisciplinary approach has even more utility now in relation to the occupancy structure of corporations," she says. "The firm's small size and flexibility is a benefit in solving the myriad types of corporate real estate problems."

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