5:Benchmarking in Real Estate Management

5:Benchmarking in Real Estate Management

5.1 Definition of Benchmarking

“Benchmarking is the process of identifying, sharing and using knowledge and best practices” (Marie, 2002). According to Johnson and Scholes (1999) “It represents a management tool for enhancing an organization's performance and competitiveness”. The definitions reflect the origins of management benchmarking often attributed to Rank Xerox who used the technique to examine Japanese competitors’ processes against their own in 1979. Rank Xerox, faced with Japanese competition which sold copiers for less than the cost of manufacturing them had to find out how the Japanese firms did it to survive. Thus, in business, benchmarking is about comparing processes to enhance performance.

In the context of real estate (RE), benchmarking as a concept focuses on the analysis of performance and seeks to examine the tangible measurements for example:

-Sales per square metre

-Total occupancy costs per square metre

Benchmarking can be broadly classified into external and internal benchmarking as follows:

-External Benchmarking

-Internal Benchmarking

5.2 External Benchmarking

External benchmarking is used by organizations to seek the help of other organizations that have succeeded on the account of their practices. It provides an opportunity to learn from high-end performers

RE example:

Companies may want to examine their performance against others. For example, IPD measures investment performance of the majority of portfolios in the UK and increasingly internationally. Thus, portfolio managers can compare their own performance against that of IPD universe or individual subsets. This can also be done for occupancy costs using IPD’s Space Code and Occupancy Costs benchmarks or that produced by Actium Consult.

There are five types of external benchmarking as follows:

5.2.1 Strategic Benchmarking

It is aimed at improving an organization's overall performance by studying the long term strategies and approaches that have helped the “best practice” organizations to succeed. It involves an examination of the core competencies, product/service development, and innovative strategies of such organizations.

RE example

Bruntwood, a privately owned commercial RE company has utilized comparisons with the hotel industry and Lexus cars as a way of improving customer servicing for their tenants. Bruntwood consistently ranks first in the Real Service Best Practice Index for Benchmarking Real Estate Excellence.

5.2.2 Competitive/Performance Benchmarking

This type of benchmarking is used by organizations to compare their positions with respect to the performance characteristics of their key products and services. Competitive benchmarking normally involves organizations from the same sector.

RE example:

Retailers will use this technique to compare their performance, for example, sales per square metre against their competitors.

5.2.3 Process Benchmarking

It is used by organizations to improve on specific key processes and operations with the aid of “best practice” organizations involved in performing similar work or offering similar services in the same business sector.

RE example:

BA examined other industries’ and USA based operations’ service level agreements to improve on service delivery and turnaround times of lease management operations.

5.2.4 Functional/Generic Benchmarking

It is used by organizations to improve on their processes or activities by benchmarking with other organizations from different business sectors or areas of activity but involved in similar functions or work processes.

RE example:

A number of customer focused landlords have examined the hotel industry to introduce more customer focused lease management and provision of additional services to tenants including concierge services in office buildings.

5.3 Internal Benchmarking

It involves benchmarking against companies outside the country where there are very few suitable benchmarking comparisons within the country.

RE example:

IPD can be used to examine international portfolio composition and performance and DTZ produce an annual table of occupancy costs in 137 businesses in 49 countries.

Internal benchmarking involves benchmarking against an organization's business units of the company situated at different locations. It allows easy access to information, even sensitive data and also takes less time and resources than other types of benchmarking.

RE example:

Retailers such as Boots Chemist will use internal rents to calculate occupancy costs and compare this across the portfolio. They may also examine the sales to costs on a square metre basis across their UK high street stores.

5.4 Benchmarking in practice

It is important to examine some concrete examples of what is actually measured by organizations to help monitor & improve performance. Similarly, what data is available for organizations to make comparisons against usually referred to as benchmarks need to be examined. Table 1 contains examples of performance measures:

Table 1

Many businesses will normally seek to tailor their performance measurement to their business operations. This aids them to understand RE commitments in the context of their business. Below are some examples of both generic and bespoke performance measurement used by leading organizations:

• Cost to income ratio by unit of RE (Nat West Bank)
• Occupancy cost per sq metre (British Gas)
• Occupancy cost per employee (HSBC)
• Number of help desk calls per sq foot (Lloyds TSB)

Benchmarking in the RE industry

There are four stages in the benchmarking process in RE:

a)Understand RE and business objectives

b)Identify opportunities by comparing key RE measures against competitors

c)Identify solutions by assessing critical drivers

d)Implement and revise solutions consistent with changing business objectives

Embarking on a benchmarking exercise requires:

-Considerable commitment of both time and resources from an organisation; and

-A willingness to share information

It also requires corporation by organisations to reveal useful opportunities that can improve performance. To this end, benchmark clubs have been set up to share and benefit from information.

The “apples and pears” problem

All benchmarking exercises are often plagued by inconsistencies with data, making comparability difficult and in some cases meaningless. This is often referred to as the “apples and pears, not apples and apples” problem. In RE, this is also a major issue since RE benchmarking may be comparing units of RE which vary in terms of, for example, measurement and occupation:

(a) Measurement

Many RE benchmarks are related to area, for example, total occupancy costs per sq. meter. The problem is that the way buildings are measured varies dramatically across Europe and more so across the globe. Therefore when benchmarking is undertaken, a consistent approach needs to be adopted. There are many definitions of measurement and codes of measuring practice. RICS Code of Measuring Practice for example is intended for use only in the UK and does not apply to global measuring practices. RICS has 3 core definitions of area:

-Gross External Area [GEA]: It is essentially all the floor space enclosed by the perimeter wall of the building whether permanently covered or not. It includes all the uncovered internal spaces in the building plus all spaces taken up by the thickness of walls, partitions, columns, stairwells, lift -wells, internal balconies, garages, conservatories, attached outbuildings etc.

-Gross Internal Area [GIA]: GIA is simply the GEA minus the thickness or total floor space covered by the perimeter wall. It includes all floor spaces included in GEA except the thickness of the perimeter wall of the building.

-Net Internal Area (NIA): It is the usable space within a building, measured to the internal face of the perimeter wall. It excludes all internal areas taken up by other elements of the building such as the walls, columns, stairwells, lift-wells and permanent lift lobbies, corridors and other circulation areas etc.

Accurate & consistent measurement is critical but the biggest problem arises with the definition of the word usable when calculating NIAs. It is a common calculation and underpins many benchmarking and performance calculations. The efficiency of a building may be benchmarked from the landlord’s perspective: That is, how much floor space is usable and therefore rentable compared to the built area. In this regard, the higher the ratio, the more efficient the space.

This may also be critical in the calculation of:

-Service charges; and

-Particularly sales per sq metre of usable retail space or costs of staff per sq metre of net usable area

The problems occur when companies try to benchmark across national boundaries. For example, in Europe, there are many standards that do not have a consistent basis of measurement. In addition to RICS Code for UK, there is NEN 2580 used in Belgium and the Netherlands and DIN 277 used in Germany, Austria and Switzerland. In the USA, Building Owners and Managers Association (BOMA) Floor Rental Area (FRA) standard is used.

Research conducted by Jones Lang LaSalle has demonstrated the significant differences between countries and examined the variation in leased areas from BOMA FRA to locations in Europe. The findings show the following variations:

-UK is -13.6%

-France is -2.5%

-Norway, Turkey and Israel is +7.2%

When comparing against the RICS NIA the situation is even more diverse – the deviations are:

-USA 15.7%

-Belgium 21.2%

-Norway 24.1%

-Sweden 7.3%

-Germany 12.2%

The above study shows for example that a total difference in area of 24.1% may occur when comparing “usable” areas between the UK and Norway without adjustment which could be highly misleading. To combat the preceding problem, a new code for the whole of Europe is being proposed known as “FM Six Pack” but this is still limited to Europe.

(b) Occupation

When comparing units of RE in a portfolio, for benchmarking purposes, it is possible that some units will be FH and others LH. In calculating for instance total occupancy costs across a mixed retail portfolio, there is a problem as rent will be a major component of the LH units but not within the FH units of RE.

Criticisms of benchmarking

Even though benchmarking is considered to be effective, it has some limitations.

Firstly, it focuses too much on data and not the processes behind the data.

Secondly, benchmarking practices are retrospective as they measure company history rather than incorporating current trends and projections. Thus, they are of limited assistance to an organization aiming to achieve a competitive advantage.

Thirdly, no one outside the “best practice” companies actually knows what the “best practices” really entail: What is seen from the outside is actually the results of “best practice” and not the “best practices” themselves.

Fourthly, copying competitors’ approaches may produce inherently conservative improvements, which may inhibit innovation.

Fifthly, benchmarking cannot be applied to measure qualitative performance indices such as brand strength.

Sixthly, organisations need to determine what will work for them. Thus no two organisations have the same resources or capabilities and therefore working towards their own goals is what actually matters.

Lastly in the past, over-reliance on readily available aggregated data rather than customised benchmarks has produced inconsistencies because assessing performance relative to industry averages is like comparing apples to a basket of mixed fruits.

1