Operational Priorities Every Leader Should Consider

Last year was a year like no other. No company, public, private, big or small, escaped the challenges created by the global economic downturn. To remain competitive, it will be critical that company leaders focus on two key operational priorities: Working Capital Liquidity and Talent Management.

As companies wait for the credit markets to thaw, they must continue to look inward to get the working capital required to fund their operations. This is not a new concept, as most leaders spent last year rightsizing their organization, renegotiating contracts and trimming inventory. The challenge moving forward will be discovering how to continue to trim without creating new risks or shedding precious talent that enables future success. Expect leaders to focus on the following changes in the coming year.

• Getting crystal clear on the “end game” – Now more than ever, companies must be clear on their business strategy. Every action must be focused on bringing the strategy to life. No investment should be made, no employee should be hired and no expense should be approved without an understanding of how it furthers the company’s objectives and goals. Without this level of clarity, it will be difficult to know how to best use the company’s capital – both human and financial.
• Thinking like a customer from end to end – When companies face down turns, they typically begin by cutting discretionary spending and/or rightsizing by mandate. While this approach may result in lower costs, it rarely addresses the non-value added activities and assets that exist in the “grey space” across the value chain. A more pragmatic approach is to take an end-to-end view of processes from the eyes of the customer. By starting with a customer’s needs and working back, companies can reveal how long it actually takes to satisfy customer needs and where excess capital is being consumed in the form of inventory, excess labor, etc. All too often assumptions about customer needs create added steps or inventory that really only exist to accommodate for internal inefficiencies or misaligned management policies. By evaluating this information, companies can ensure they are consuming the appropriate amount of resources to deliver the expected results.
• Doing it better than anyone – With a clear end in mind and an efficient process in place, it is vital that products and services are delivered flawlessly. Creating a quality product the first time in a world of razor thin margins and fickle consumers is now table stakes. Independent of if you credit Deming, Toyota, Motorola, GE or another quality pioneer for the concept of “doing it right the first time,” it is important for companies to embrace and practice this concept. There is no longer room in the margins for missteps or rework. Today’s consumers expect perfect quality and do not hesitate to move their business to another supplier when missteps occur. Leaders must ensure their processes are reliable and producing a quality product consistent with the customer’s expectations.
• Retaining your rainmakers while making more – This year companies must recommit to retaining their “rainmakers” and developing new ones. In a world of sliding consumer confidence and painful layoffs, companies will become more reliant on their top talent. It is imperative that companies review the ranks and identify leaders who are enabling success (as well as those who are not). To borrow a concept from Jim Collins, author of the bestselling book Good to Great, getting the “right people on the bus is important, but getting them in the right seat as important.” This is the job of leadership. Now more than ever, it is crucial for leaders to identify, align and invest in the resources who can deliver their strategy now and in the future.

This year is sure to present new challenges, but today’s leaders can prepare by focusing on these important changes. While these may seem obvious, far too often they are overlooked for the newest technology solution or an acquisition opportunity that is professed to deliver huge savings. The reality is that rarely does a “silver bullet” solution exist, but with clarity of purpose, efficient processes, unmatched products and the best talent, successful companies can beat their competition in any economy.

Sucess Factors For Succession Planning

Critical success factors for succession planning include (1) Aligning succession planning with overall business strategy, (2) Enrolling executive leadership and (3) KISS (Keep It Simple Stupid). Effective succession planning is critical today for both large and small organizations, as the demand for top talent grows and the retirement of baby boomers leaves talent gaps. These are particularly pressing issues at smaller companies with leaner staffs. While many believe succession planning is only necessary for the C-Suite, it is as or more important to implement for other key leadership roles. Companies today are implementing succession planning processes across their organizations to define talent needs, assess current employees and implement development plans to groom future leaders.

The most important success factor for succession planning is directly linking it to the overall business strategy. This enables succession planning to support the long-term goals of the organization and keeps the process focused on the ultimate prize. Like any other major initiative, strong executive support is required for success. Succession planning cannot be delegated to HR and forgotten. Leaders at all levels need to promote its importance and be engaged in the process. Finally, the succession planning process needs to be simple so that busy executives do not view it as one more task that takes them away from running the business. Successful succession planning can be a competitive advantage for companies as the demand for talent continues to grow.

Urban Core is Still the Region’s Best Location for Office, Retail

Where is the best place in the region to locate if you want to be convenient to the highest number of knowledge workers? You would expect the answer to be Union Centre or Fields Ertel considering the high level of attention given to “growth areas” such as Mason, West Chester and other areas outside of the I-275 loop.

A recent project Cascades Advisory Group completed for a client to find locations within a 10-15 minute drive of college educated, high income earners yielded surprising results. The “hot spot” most convenient to these workers and consumers is centered on the urban core (the broader target area is between I-75 and I-71, stretching roughly from Norwood to the north, down to Newport and Covington to the south).

Why should you care? Location decisions are becoming increasingly more important for companies searching for office space and retailers opening new locations. As fuel prices rise and people desire to spend less time in a car, companies need to be in a good location to attract and retain talent, and likewise, retailers need to be located in areas that are accessible to the highest number of their target customers.

Why do we believe the urban core is the best location for offices and destination retailers? Two main factors lead us to these conclusions - density and road infrastructure. The road infrastructure advantage is probably the most obvious. If you look at a street map of Cincinnati, the urban core and first ring suburbs have a fairly well developed street network, with most major highways meeting in or near downtown. A large population can reach our urban core in 10-15 minutes, while more suburban areas have a less developed street network, which increases the drive time between the many cul-de-sacs and major roads. Because of these differences in road infrastructure, people near the urban core can travel further in a given amount of time (and therefore an urban site can attract more people within a given drive time).

Density is perhaps less obvious, but even more important. Often, people focus on averages, medians and percentages when making location decisions. Median Household Income, Percentage of Households Earning over $50,000, Percentage of Adults with a College Degree, etc. are just a few common metrics used by retailers and companies when selecting a location. Using this type of data can be misleading. For example, if the area around Location A has 50% of households earning over $50,000 and the area around Location B has only 25% of households earning over $50,000, Location A appears to be a better choice (twice as good). But if Location B has 3 times as many households within a 10 minute drive time, then there are more households earning over $50,000 near Location B. Focusing on absolute numbers of target customers / employees is the more accurate way to evaluate locations.

While people often consider total number of households or population, they tend to overlook the total number of target households within a convenient drive time. Companies need to determine all of the factors that make a location successful - competition, target employee / customer profiles, proximity to vendors, etc., as well as market factors (lease rates, available space, land costs and availability). Our analysis and further study convinces us that the urban core is still the best area in the region for most office and retail users. We believe the urban core will become even more attractive as gas prices continue to rise and people work to limit their time spent in a car. Maybe Cascades Advisory Group’s decision to locate downtown on Fountain Square was even smarter than we thought.

What is the return on your real estate?

Common knowledge says real estate is a good investment with strong returns and low risk. Many companies use this rationale to justify owning vs. leasing. But is real estate truly a good investment of a company’s capital?

A closer look at the historic returns on commercial real estate tells a different story. Data from the National Council of Real Estate Investment Fiduciaries shows the average annual appreciation of commercial real estate has been 2.3% since data collection began in 1978. Even appreciation returns from the more stable period of 1994 to 2006 were only 3.2%.

The average annual return on equity for the companies in the Dow Jones Index over the past 10 years is greater than 21%. Even if you factor in the rent you save from owning real estate, the returns from investing in your business should significantly outpace real estate returns overtime.

Is your company settling for lower returns?

There's more to real estate than just lease rate and term

Cascades own Jack Keating was published in the March 2008 edition of CFO Magazine responding to an article about the commercial real estate market in six cities. As Jack was quick to point out, there are a myriad of factors to be considered when selecting a location beyond just lease rates.

CFO Magazine March 2008 Issue, Letter to the Editor from Jack Keating of Cascades Advisory Group

Thinking about the Box

Your article on real estate markets ("A Tale of Six Cities," December 2007) was accurate, but it oversimplified corporate real estate decisions. In our experience, many companies have not considered the full impact of real estate deals beyond a lease rate and a broker's market analysis.

Your story cites a clever CFO who negotiated a fixed purchase option on a lease and turned a handsome profit. A fixed purchase option potentially creates a capital lease, which may or may not be in the best interest of the company. Additionally, a fixed purchase option can have an adverse effect on the lease rate because a landlord will price in the risk of giving up value at the option date. Finally, trying to time your business needs to the ups and downs of the real estate market can be a risky proposition.

Corporate leaders should not lose sight of the fact that real estate is more than a box for their operations. There are a number of financial, operational, and strategic issues that must be considered beyond the lease rate and term. More often than not, we find that our clients can get a higher return on investment in their operating business than in their real estate.

Should my company own real estate?

The simple answer is NO. Companies should invest capital to achieve the highest returns, which likely is through investing in their business, not real estate. This concept is somewhat counterintuitive, since it is widely believed that renting is just throwing money away, while owning builds equity in the real estate. Many business leaders also desire the perceived and real control ownership provides. For individuals, real estate ownership can create significant value, but for most companies, a dollar investing in equipment, talent and other revenue generating assets has a much higher return that a dollar invested in the real estate. Companies can maintain operational control of the real estate through a lease that nearly mimics their control as an owner.
The buy vs. lease decision requires thorough analysis, considering both financial and operational factors. Real estate transactions can have significant GAAP and tax implications and need to be carefully structured to support the financial objectives of the business. Additionally, operational considerations must be weighed when selling assets and structuring leases to secure required controls. The broader state of the real estate market is also a factor and significantly influences the value of real estate assets.
The current market, although not as robust as 2006 and 2007, remains strong for quality companies to perform a sale leaseback transaction. National cap rates (the return on real estate) are near historic lows across all real estate types because the risk premium for real estate has decreased over the past few years and anticipated growth has been high. Lower cap rates translate into higher values for sellers of real estate. A company can often generate capital from a real estate sale at a lower cost than borrowing capital for an acquisition or other strategic use.

Measurements Do Matter

What gets measured gets done. That’s all there is to it. We have known this since the first grade, as I was reminded this week as my seven year old is in the middle of testing at his school. So why do so many organizations struggle with how to measure performance and link individuals’ goals to company objectives? Why is it not as simple as my son’s school, where kids who achieve a certain score are moved to a “gifted” program where the rest remain in the standard curriculum?

The biggest challenge I have seen with measuring performance is identifying and agreeing upon the right metrics at the corporate, function and individual level. I believe the reasons things often break down are twofold:

One tendency is to start with the metric – sales calls, throughput, training hours, etc. This is completely backward. The right place to start is the desired outcome – what are you trying to achieve as a company, a department and an individual? Starting with the goal in mind and then determining how to measure progress towards this goal begins to directly link individual performance with company strategy.

The other tendency is to start at the bottom with individuals setting goals without a clear understanding of how they link to the company’s strategy or desired outcomes. Goal setting usually happens on an annual or maybe even a quarterly basis, while the company’s strategic plan has been sitting on the shelf for a number of years and is not longer relevant to the current goals. Leaders need to clearly articulate their goals for the company and how functions and individuals contribute to success.

I am a big proponent of the Balanced Scorecard as a performance management framework to “translate strategy into action”. The idea of utilizing the Balanced Scorecard or another approach is intimidating to some, because it seems like a lot of work to end up with the same old measures. The key is not the tool, but the process of reexamining the company’s goals across a number of dimensions and effectively communicating them throughout the organization so individuals can relate to how they impact the broader success. I will discuss the Balanced Scorecard in more detail in a future post.