Berkshire Hathaway is an effective company. Its businesses dominate their industries, have great managers, excellent economics and durable advantages over the competition. Berkshire is a decentralized holding company of phenomenal businesses, amassed by the worlds’ greatest “asset allocator” and my role model, Warren Buffett.
Decentralization at Berkshire is strategic and necessary. “These (managers) are people who are .400 batters. I do not need to tell them how to swing. I tell them just one thing: to send me a letter, that I will keep in a private place, in case they are to die, what I am to do”. – Warren Buffett. The severity of Berkshire’s decentralization is founded on the principle that the economics and management teams of Warren’s businesses are so good, that Warren has no business tinkering with them. His job is to allocate excess capital that the businesses spin off, and to provide his wisdom when it is requested.
The important benefit of being a Berkshire company is not that Warren is at the helm; rather it is the low cost of capital (AAA credit rating that only a handful of companies in the world share) and the long-term perspective of its owners. To wrench additional efficiencies out of independently operated and unrelated companies that have already mastered their respective economics is fruitless. However, for companies with related businesses or units, it can be very profitable. And centralization of real estate asset management can be a good place to start.
Selling the concept of corporate real estate centralization is like selling the concept of one-stop-shopping. The value is in efficiency and purchasing-power. Instead of independently shopping for similar resources, why not collectively shop for resources in a consolidated effort? In corporate real estate, this means relieving operating managers of their real estate duty, and allowing them to maintain focus on operations. The caveat being the connection between business-unit manager’s incentive structures, which commonly include the real estate expense and are linked to the unit’s P&L, and how it is restructured to reflect the changes. The good news is that the purpose of real estate centralization is to save money.
The question becomes whether the centralization effort is worth the reward. In my previous post An Uncoordinated Effort this was clearly the case. Under less extreme circumstances, the benefits can include accountability, synergy and economies-of-scale. McDonald’s for example, operates owned and franchised stores. But the franchisees don’t secure the convenient intersection locations for their restaurants, how could they? They lack the expertise and capacity to do so. Instead, McDonald’s has regional real estate teams. Accountability resides with those who are set up to manage real estate, not operating managers who are set up to oversee operations.
Other than credit, economies-of-scale is most prevalent with corporate real estate provider relationships. The local CRE provider and business unit relationship is only as good as the next deal. When deals are few and far between, incentives and motivation is limited. Conversely, when an individual deal is only a fraction of the overall pie, that deal receives the same attention as if it were the pie itself. For example, a company with multiple locations, leased and owned, might receive strategic planning and space utilization services that it would otherwise not receive had it not been part of a “centralized” partnership. Furthermore, such services are likely to be free to the corporation as the service provider might offer it as a value-add service, subsidized via a commissionable event. (i.e. a market-driven and landlord-paid transaction commission).
Like at Berkshire Hathaway, it becomes difficult to regress when great operating managers are enabled to focus on operations. If real estate falls outside of their circle-of-competence, as is does for McDonald’s owners/operators, centralization of real estate asset management may have merit. If internal resources are lacking corporate real estate expertise or capacity, partnering with a firm that does may have merit as well. For McDonald’s, centralization of real estate became part of their competitive advantage.
Rory Johnson 10/12/2007
rory@intelligentcre.com
{ 1 } Comments
Rory, you’re right and you are wrong.
I wholeheartedly believe that there can be an efficiency gained by isolating and defining real estate processes and decision-making capacities - operations managers, for instance, should be focusing on operations rather than being forced to wear multiple hats and dilute their value to the organization.
However, it is worthwhile to distinguish between “specialization” and “centralization”. The former is the means by which you place dedicated experts into roles for which they are well-suited; the latter relates to creating a single source or well-defined hubs of decision-making capacity. Specialization is valuable because it puts the right people at the helm of the real estate strategy and execution - whether this is through internal resources or an external firm is peripheral. Centralization, on the other hand, may actually reduce efficiencies - rather than ensuring best-in-class decision makers, you have the potential of creating an averaging effect across your real estate decisions. The team at corporate HQ may understand the ins and outs of workplace integration, but not be intimately familiar with the local office market on the other side of the world - in essence, potentially creating a situation of penny-wise but pound-foolish.
All told, a great post to get decision makers thinking.
Post a Comment