CFO: Corporate Campus

From CFO in 2002.

THERE has never been a better time for custom-built facilities that
cater to your business. The pay-off is accelerated growth, recruitment
advantages and higher retention rates,

They say you can’t have your cake and eat it. But in terms of cutting property costs while keeping staff happy and maintaining productivity, that old adage appears to be past its sell-by date.

While the migration towards open plan is proved to improve staff communications and increase morale, it also offers hard-nosed financial savings. They are a lot cheaper to run and fit out than fixed offices. Their flexibility means that the cost of moving staff is minimised. And it means less space can be allocated to staff.

While many a manager (and union rep) will baulk at being crammed into smaller space, it does work, as proved by the correlation between high rental costs versus low square metres per employee around the world.

While Australian workers don’t bask in the 20-24 square metres enjoyed by the average US employee, with an average space of almost 20 square metres, they are much better off than the average London-based worker who enjoys just 15.6 square metres of space and the highest rental costs in the world. Similarly, workers in Melbourne, where rents are cheaper, tend to have more space than in Sydney.

According to Stephen Ballesty, director at property consultant Rider Hunt Terotech, the cost of fitting out major company headquarters ranges from $800 to $1100 per square metre in Sydney for fully unpartitioned space, and $850 to $1300 per square metre for fully partitioned space. Similar price differentials exist in each state’s capital city.

The Office churn research report, produced by Rider Hunt Terotech for the Facility Management Association of Australia, indicates there is an enormous cost in keeping property abreast of the changing pace of business. The cost of relocating office staff – defined as “churn” – is $3.6 billion a year. On average, 36 per cent of staff are moved each year with a cost on average of $2482 per person. Some companies, however, manage much less. For example, American Express’ churn cost is $102 per person.

How well a company’s cultural change can be integrated into a building is borne out by the experience of financial services company MLC, now absorbed into National Australia Bank. Two years ago, it moved into its revamped north Sydney building – Campus MLC.

Michael Cameron, chief operating officer of wealth management at the National, previously CFO of wealth management at MLC, says that the staff turnover at the organisation wasn’t exceptional. “But it was always difficult to recruit people into a fairly traditional environment in a building that was more than 40 years old in a business that was over 100 years old. It looked like an office that you would expect from a funds management life insurance company that had been around for a long time, not one at the leading edge,” he says.

The results were good. Staff benefited from 55 per cent more light. By reducing the space per person from 22 to 12.5 square metres, 30 per cent more space was found. Originally the building was designed for 1400 people, but the merger with NAB meant 1870 moved in and were easily absorbed.

Cameron says the new layout gave the company the ability to expand and contract rapidly. The start-up time of large projects involving more than 100 was reduced to overnight. More important, staff turnover and absenteeism reduced.

The 12-storey building houses two floors of call centres plus administration, distribution, marketing, finance and accounting functions. Everybody works in open-plan offices. Central stairs connect the floors. Each floor has a kitchen and cafe, as well as meeting rooms.

Rosemary Kirkby, who was head of people at MLC at the time, headed the project. She says it was viewed as a business project and an investment in people rather than a property project. She hand-selected the property team for its willingness to understand the business and engage with the people.

Kirkby says: “I’d never renovated a building before but I knew the outcomes I wanted.” Since moving in, management have been able to observe how people have adapted to the building. Kirkby, now general manager, business transformation, says: “The interesting thing is that we probably built too many meeting rooms. They tend to get used as quiet rooms for individual work.”

This experience is born out by Cameron. “From a personal point of view, and it’s probably unusual coming from a bean counter, the cultural benefits far outweighed the other issues. If I think about the floor that I sit on, it has a cafe, and a staircase that goes upstairs and downstairs,” he says.

“We normally would have had formal meetings with people in the business and few ad hoc discussions. These days, because people visit the cafe, which is right in the middle of the finance area, there are a lot of informal meetings and discussions taking place.” This change has opened up communication channels.

Cameron says the change has performed “reasonably well” from a financial perspective. But this change is really about the softer things. “It’s one of those things that is difficult to measure. You need to give equal weighting to the non-financial aspects and the building of a community,” he says.

“You need to be a little broader and find a way of making it happen, rather than be the person who puts their foot down and says as a finance person we can’t let this go ahead because it doesn’t achieve the appropriate rate of return.

“I have no doubt in my mind that it has accelerated the growth of business and given it enormous advantages in recruitment and the retention of people.”

Other companies have aped Campus MLC. But few have taken on the philosophy, which centred upon a massive change program, in full. Kirkby says: “A lot of people drive the architects mad because people say they want a Campus MLC. They have to say, ‘We can give you the process, but you may get a different result’.

“I can walk into spaces around the city now that look exactly like Campus MLC, but you know when you step into them they are not. Why not? Because people aren’t behaving in the way people behave at Campus MLC.”

Kirkby says: “We constantly ask how you measure the benefits of this. We tend to look around and look at the results we are getting on the bottom line.

“Here what works is that there is a coherence between the built environment, the way we behave in it and our business strategy. So all the things dovetail together.”

So successful has the Campus been that next year the National is moving 4000 of its wealth management staff to a 59,000 square metre, custom-built facility in Melbourne’s docklands. Kirkby is joint project director with Peter Affleck from the National’s property side.

Affleck says: “With this kind of operation, a campus operates more outwards than upwards. While there is a physical outcome, it really is the physical manifestation of your changing business design.

“We are taking Campus MLC to learn from and taking the next step,” he says.

GOOD TIME TO RELOCATE

Now is the time to move. A slump in demand means that both office rents and the costs of fitting out offices are at a low.

Tony Crabb, national manager of research, at FPB Savills says: “There are some terrific opportunities; the best we’ve had for years.

“As a result of robust economic growth in 1998 and 1999, in 2000 there was enormous demand for office space across the country. Things really started to fall away from March 2001, partly because of the dot.com bust.”

Crabb says that Sydney was hit the hardest, exacerbated by the economic shockwave of September 11.

Nick Snashall, director of building consultancy at property consultant DTZ, says because of downsizing there is a lot of hidden sublease space in the market.

“We’re seeing a lot of movement in the market,” says Snashall. “Companies are having to show to their parents back in Britain or the United States that they have downsized.”

According to The Property Council of Australia’s January 2002 Australian office market report, Sydney office vacancy rates are 6.26 per cent compared with 5.02 per cent in July 2001 and 4.85 per cent in January 2001. The driving factor behind the trend was that businesses were downsizing, bringing an extra 75,868 square metres onto the Sydney market.

The report says that premium vacancies increased by 21,818 square metres to 9.5 per cent at January 2002, up from 5.1 per cent at July 2001.

Melbourne’s office market is more stable but is still soft, with an increase in vacancies to 5.5 per cent from 5.1 per cent at July 2001.

Snashall says: “One of the biggest pushes for companies to relocate is morale. To show that you’ve got over a particular hurdle, many companies say, ‘Why don’t we get a new start, a new sheet of paper and off we go’.”

TERRORISM RISK LOW

In the light of September 11, now is probably not the time to buy property – unless your company wants to enter the risky insurance business big time.

Prior to September 11, according to the Property Council of Australia, all buildings had terrorism insurance. Now less than 40 per cent are covered. After the event, insurers rewrote their policies, and terrorism insurance is almost unavailable or too expensive to bother with.

“A lot of big owners can’t source insurance and the total value of the asset is not covered,” says a Property Council spokesman. Deaths of employees aren’t covered either.

In one of its recent notes, Credit Suisse First Boston states: “The withdrawal of insurers and a failure of governments worldwide to stand in their role has now effectively placed many companies in the insurance underwriting business whether they like it or not.” In Britain, where there is more active terrorism than in Australia, the Government has come to the rescue by acting as a terrorism insurance underwriter.

In Australia, however, despite lobbying from many organisations, the Federal Government refuses to help business.

This leaves a property owner bearing the brunt of the risk. According to the Property Council, this is likely to have a negative impact on property investment locally as investors look to other markets where similar returns can be had with less risk.

From corporate rentals there could be an increase in outgoings, which typically cost about $100 per square metre.

Added to this burden are the increases in public liability insurance, required for any building. While the average policy increase has been 27 per cent, some have risen by 600 per cent. One shopping centre saw its premium increase from $8000 to $50,000.

Berkshire Hathaway’s chief, Warren Buffet, notes that using experience as a guide to pricing is not only useless, but dangerous. He says that his insurance company General Re lacked discipline in assessing its risks.

“In pricing property coverages, for example, we had looked to the past and taken into account only those costs we might expect to incur from windstorm, fire, explosion and earthquake.

“But what will be the largest insured property loss in history [after adding related business interruption claims] originated from none of these forces.

“All of us in the industry made a fundamental mistake by focusing upon experience, rather than exposure, thereby assuming a huge terrorism risk for which we received no premium.”

The lesson is that while the probability of terrorism-caused disasters are low, it is not zero.

COST OF RELOCATING OFFICE STAFF
Measure                 Partitioned     Open-plan
                        office          office
Churn rate (%)          52.7            38.8
$ per sqm per annum     68              82
$ per person            1600            973
Source: FMA Australia Office churn research report

OPEN PLAN OFFICE FIT-OUT COSTS
Office type             Sydney          Melbourne       Brisbane
Adelaide
                        ($/sqm)         ($/sqm)         ($/sqm)         ($/sqm)
Insurance offices,
government depts               550-775         600-750         600-700
500-750
Major company HQs      800-1100                700-900         700-850
700-1000
Solicitors, financiers 1000-1350       750-1050                750-950
900-1200
Executive areas                -               -               –
–
Computer areas         -               1500-3000       1500-3500       –
Source: Rider Hunt Terotech

FULLY PARTITIONED OFFICE FIT-OUT COSTS
Office type             Sydney          Melbourne       Brisbane
Adelaide
                        ($/sqm)         ($/sqm)         ($/sqm)         ($/sqm)
Insurance offices,
government depts               700-1050                750-950         700-900
        600-950
Major company HQs      850-1300                900-1150                850-1050
                750-1200
Solicitors, financiers 1300-2500       1050-1350       950-1250
1200-1500
Executive areas                4500-7000       1500-4000       1500-4000
3000-4000
Computer areas         1750-2000       -               –
1500-1800
Source: Rider Hunt Terotech

HIGH RENTAL COSTS VS LOW SQM PER EMPLOYEE
        Rank                                               Rent
Outgoings                Vacancy Rate Offices
Asia-Pacific   World           City            (sqm) $A        (sqm) $A
        Jan 2002                Jan 2001
9              33              Sydney          570     120             6.30
        4.80
16             63              Melbourne       365     100             5.50
        6.20
18             69              Perth           260     95              10.1
        9.0
20             72              Brisbane                235     95
7.30            7.20
22             75              Canberra                300     85
4.30            4.00
23             76              Adelaide                285     85
11.9            11.5
Source: DTZ Global office occupancy costs survey 2002, Property Council of
Australia