Almost all agencies have grown by
acquisition, resulting in a mix of facilities. Many older satellite-office
locations are oversized and single purpose in nature: former agency
headquarters or large offices built for when the industry needed many more account
manager/CSR/producer workstations and principal agent office space than today.
So it’s no surprise that on the cusp
of 2017, we have far more invested in facilities than needed—and in an ideal
world, we would reduce satellite-office configuration and cost. This would make
agencies more efficient and free up capital to invest in new channels that
better meet changing customer needs.
The question is not whether this should be done. It’s how. As one agency CEO told us, “I know we have facilities that aren’t suited to our needs, but given the capital investment I can’t afford to do anything about it.”
But we need to do something about
it.
New channel creation shows no sign
of slowing down: It takes time and money to internally develop or purchase.
Given the expense of regulatory burdens and other financial pressures, how can agencies
fund new services, delivery channels and technology?
- Plan to align resources to market opportunities. This directive may sound obvious, but all too often agencies neglect it. Avoid jumping to the ease and convenience of addressing a specific site before determining the overall market potential; develop a “clean slate” view of your agency’s total distribution. We’re often surprised by the significant unrecognized opportunity in markets that management believes have low potential. Use data to ensure that staff resources are aligned at locations where room lies for greater income—and focus divestment or restructuring with an eye toward minimum market impact.
- Leverage the Financial Accounting Standards Board new sale-leaseback rules. With a strategic sale-leaseback, agencies sell a satellite-office but still operate from the same location. This has become an attractive option under a recent FASB accounting change. The new rules enable agencies to enjoy immediate recognition of gains on a sale as tier-1 capital that’s non-dilutive to shareholders. Strategic sale-leasebacks unlock agency satellite-office capital to fund a host of strategic initiatives. These include book-of-business growth, new technology and satellite-office redesigns.
- Downsizing a satellite-office via a sale-leaseback can provide unique benefits. Besides any immediate capital gain, expenses shrink due to reduced square footage. This also lessens costs for facilities upgrades or technology implementation. Additionally, an agency will often not have to pay for the construction and development costs of a downsizing—in fact, downsizing can be a provision of the sale-leaseback, meaning the new landlord pays for demolition, construction, and build-out to resize the space.
- Subdivide satellite-office or re-negotiate leases to reduce space. In a sale-leaseback downsizing, the square footage the agency no longer uses will most likely be leased to a co-tenant, which can help increase foot traffic and customer opportunities. For smaller satellite-offices, the co-tenant may be a small law firm or CPA office. For large satellite-offices, the co-tenant may be a full retail space, such as a coffee shop.
If an
agency has the time, resources and desire to retain satellite-office ownership,
leasing a portion of an underused satellite-office or the entirety of an unused
one can generate income. As a landlord, the agency may be required to update,
upgrade or renovate new tenant space. This arrangement also requires resources
for continued tenant maintenance, and monitoring potential co-tenancy and
ongoing regulatory issues.
If the satellite-office
is leased, the option to downsize may still exist. In many cases landlords will
renegotiate—especially if the satellite-office occupies a desirable location—or
the request can be packaged with other location options. Alternatively,
the agency could downsize on its own and sublease the unused space: a
worthwhile option for agencies with adequate resources or real estate
experience. But it could also invite the stress of hosting a less-than-stellar
tenant. Partnering with a company that offers design-build services may be a
better solution. An agency should also check its lease and talk with its
landlord as to whether vacating or building out the space and then sub-leasing
the vacancy are allowed.
- Sell unneeded or struggling satellite-offices. Closed, soon-to-be-closed, or re-tenanted satellite-offices are prime candidates for sale, either individually or as a satellite-office portfolio. If an agency contemplates selling satellite-office assets, it may want to start the process sooner rather than later.
- Build a new satellite-office. Sounds counter intuitive? Sometimes a new satellite-office may prove more efficient. In some cases, agencies saved money while enjoying a brand-new, right-sized satellite-office with lower operating costs. But this depends on many factors, including an agency’s rent, the real estate market and the price of new build in the area. If building a new satellite-office is right, an agency can either handle it or connect with an experienced developer for a long-term sale-leaseback. This may be especially relevant if the new satellite-office absorbs business from several existing facilities.
Regardless of how far along your agency
is in implementing—or not implementing—a distribution analysis and
restructuring plan, move now. Physical facilities, while important, do
not have the same value to customers as in the past. Furthermore, there’s
greater need than ever to fund new channels and technology. Agencies that
lag in these areas will only face greater challenges to remain competitive.
Then, satellite-office closings could become far less a matter of choice.
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