Sunday, March 28, 2010

One FM’s View of the Immediate Future

As part of an annual scan process we go through in preparation for the beginning of the budget season our organization takes a hard look at the financial world around us. Right now it’s not a pretty picture. Pick an indicator - residential or commercial real estate, manufacturing, job creation – they’re all in trouble. Okay, we know that. But what does it mean for FM's?

Capital to fund projects is going to be hard to come by. The majority of large projects will stay on the back burner as emphasis remains on improving the bottom line through productivity gains and cost savings. Projects that do make it through the approval gauntlet will most certainly be under increased pressure to meet or beat budget and schedule targets. Given current economic indicators corporate capital is expected to remain constrained through at least the next two years.

Commercial real estate will remain in distress through 2011. Default rates continue to rise and are expected to reach 5% this year with the bottom not coming until 2011 at the earliest. That means even tighter credit at a time when many commercial loans are due to reset. Landlords caught in the squeeze are in trouble. Watch your landlord relationships and their financial health. Their risk is your risk. It might be your opportunity as well.

Emphasis on cutting costs and boosting productivity will escalate. Many companies have made the easy cuts and still have to improve to survive, but additional staff cuts run the risk of so deeply depleting the talent pool as to be too risky. For others, the need to improve is a key to competitiveness even if they have so far remained unscathed. Companies will dial up Continuous Improvement initiatives, but the initiatives must demonstrate hard gains through specific metrics. This will include second tier metrics to make certain that credit is not claimed for gains in one sector, cost as an example, at the expense of another, i.e. quality or revenue.

FM service providers are still under pressure. Virtually every firm you depend upon for service or support is under financial duress. Some have improved their position over the last year and most will make it through, but some will not. Keep a close eye on those that are most critical to your operations or present large financial risk should they fail. One way of doing this is to include corporate financial health information in your routine monthly or quarterly contract reviews. They will expect you to be asking so don’t be shy about it. You should be monitoring key ratios, borrowing capacity, credit rating and stock value as a minimum.

Opportunities exist to gain contract concessions. It might be a lease as noted above or renegotiating terms with your largest outsourced service providers. In most cases FM’s will have several of these opportunities. Your goal here is to drive down the cost of the contract in exchange for considerations in their favor such as extending the term of the contract, while maintaining enough resource to get the job done without endangering quality.

Adoption of alternative office strategies will become more common. Even organizations that traditionally have not ventured into this territory will do so. Companies will analyze occupancy and presence data to understand the scale and scope of stranded real estate investment. For companies who need to grow doing so without real estate expansion will become a priority. Densities will increase with shifts in office entitlement policies and standards.

Smart FM’s will watch the scoreboard. You may not consider yourself an economist but now more than ever you need to understand the basics of how business works in this very interdependent world. You should be watching basic market indicators relevant to your business and thinking strategically about risk and opportunity. FM’s should be knocking on the CFO’s door with observations and trends, and proposing actions to take advantage of opportunities and/or mitigate risk. You don’t have to have details. Demonstrating that you are keeping your finger on the pulse and understand what the data potentially means to your business will raise your own stock and protect the company’s as well. Go knock on the door, don’t wait to answer the phone.

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