May 9, 2018
Tim McKinnon

One of the best scenes in the 1964 political satire “Dr. Strangelove” is of a fictitious U.S. president nervously calling Dimitri, the Russian premier, to inform him of a potential accidental nuclear attack on his country.

"Now then, Dimitri. You know how we've always talked about the possibility of something going wrong with the Bomb. The Bomb, Dimitri. The Hydrogen Bomb...."

The scene excels in the juxtaposition between tension and uncertainty: On one hand, they are facing total annihilation, and yet have no idea how to proceed. As wonderfully bizarre as the scene (and entire movie) is, it mirrors the challenge corporate real estate decision makers face today. Rapidly advancing technology, as well as a host of economic and cultural trends, has resulted in an almost constant state of change, resulting in a certain level of decision paralysis on how to shape and advance real estate strategies. In other words, uncertainty is casting doubt on go-forward decision making.

Nevertheless, not all is lost. Amid this flux, real estate professionals are looking to new methodologies, approaches and tools grounded in the concept of agility to better navigate uncertainty and plan for current and future real estate needs. Here’s how.

STEP ONE: UNDERSTANDING WHAT YOU KNOW AND WHAT YOU DON'T

Head count is the foundational metric that drives real estate needs, and fluctuation of head count is the single most impactful factor of real estate cost. Most head count forecasting today is based on antiquated methodologies that assume some level of predictability or rely on a “best guess” from the business based on quarterly business growth projections. As we all know, uncertainty is making it harder to forecast business dynamics in the short term, let alone 15 years out, and in turn harder to forecast head count. Amid this uncertainty, identifying future head count requires a deeper understanding of the potential factors that could impact a business, specifically identifying what is known and what is unknown about current and future dynamics.

Here are things that most organizations do know with some level of certainty:

  • What’s happened to the company in the past and internal or external reasons for it.
  • How different economic environments/factors have affected them in the past.
  • How good (or bad) their business units are at forecasting.

Here are things that most organizations don’t know with certainty, but that management is thinking about:

  • Internal changes, such as AI, automation, outsourcing, labor movement, new products or business line launch, M&A or divestitures.
  • External forces, such as economic cycles, competitive landscape, legislative and regulatory changes, etc.

By cataloging what is known and what is not known, an organization can start to develop a way to better understand uncertainty (and its impact) on its business, providing a clearer picture of the potential impact on head count requirements. While impossible to identify all potential contributors to uncertainty in a business, there is tremendous value in getting a more complete picture of the factors that can impact head count because, as we know, head count is the primary driver of real estate requirements.


STEP TWO: TRANSFORM UNCERTAINTY INTO A MEASUREMENT

Knowing that it could rain tomorrow is a given; knowing that there is a 30% chance of rain tomorrow is enough to bring an umbrella. Unquantified uncertainty is a recipe for paralysis, but quantifying it can lead to a clearer path forward. That’s where volatility comes into play.

In short, volatility measures the fluctuation in what can be quantified. Low volatility means small fluctuations and high volatility means large fluctuations. Applied to head count forecasting, volatility is a way of quantifying potential fluctuations and therefore uncertainty/risk exposure regarding future demand.

How is head count volatility quantified?

  • A high-level (but still valuable) approach is to consider historical company volatility from head count data.
  • A leading approach uses advanced predictive analytics that take into account past movements, combined with stochastic modeling of internal and external disruptors.

This quantified measurement of volatility produces a range of potential outcomes and head count requirements informing various corresponding real estate strategies. This changes forecasting from being a monolithic “guess” number to being the sum of many individual potential occurrences, which is much closer to reality.


STEP THREE: TAKE AN AGILE APPROACH

With volatility estimates and associated head count scenarios in place, an organization can develop an informed real estate strategy in line with its appetite for risk. And today’s real estate leaders, more than ever before, have a robust tool kit at their disposal. Improved approaches to forecasting (Steps I & II), as well as new, flexible tools such as co-working and more traditional tools like lease options and lease terms, can be combined to create an agile real estate strategy that accounts for the knowns and the unknowns.

This agile approach to real estate requires a bit of a shift in how many have historically viewed their options. In the past, organizations typically took an “either/or” approach. But armed with a clearer understanding of future needs and scenarios, the savviest real estate leaders are approaching their strategies as an “and” conversation, in which traditional and flexible solutions can (and should) live in harmony within a portfolio. This is the foundation for a truly agile approach to real estate.

The question then becomes: Which tools do we use? What are the costs and trade-offs of each? How much of each do we need? Leading companies have begun “stress testing” different agile strategies to understand how they perform against the full range of their forecast. How does each solution help efficiently expand, contract or reconfigure space as things change? These methods help companies value the flexibility inherent in each solution and compare the cost and risk profile of each.

CONCLUSION

If nothing else, remember these five key points:

  1. Uncertainty is the new normal.
  2. Navigating uncertainty requires a deep understanding of what is known and unknown.
  3. Uncertainty can be quantified as volatility.
  4. Volatility is the foundation of agility—right-balanced, nimble, business-need-aligned real estate mix.
  5. The individual tools (e.g., coworking) are less important than the cohesive value (cost reduction, flexibility).

“Dr. Strangelove” is a movie about people who are paralyzed by uncertainty. That paralysis causes indecision, which winds up causing the situation that they were trying to avoid in the first place. The situation is moving too quickly for anyone to plan an effective response. In the same way, the fundamental problem of real estate strategy has shifted from periodically realigning real estate with the business to designing solutions that adapt and change as the business goes along. This can seem both abstract and insurmountable, but it simply requires only a change of perspective and a little math.

If anyone asks, the entirety of agile real estate can be summed up in one phrase: “Don’t change the plan. Plan for change.”

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