Advice provided by: Dan Winters, LEED AP, Evolution Partners Real Estate Advisors

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The largest single expense category on the Profit/Loss statement of any knowledge-based company is its people.

Every day these assets walk out the door. The managerial challenge is to keep them coming back and, when they do, provide an environment conducive to maximizing their efforts. Your people are your power as it’s one of the few investments that can actually drive the top line.

Given the “Free Agent Nation” mindset adopted by many knowledge workers, leading companies scramble to do whatever they can to attract and retain highly talented workers.

Software developers, legal and consulting firms, marketing and public relations companies, architects and engineers are the types of firms most attuned to this issue; but clearly this affects functions at companies across all industries. Smaller firms are particularly vulnerable as a few key employee defections can cause serious business disruption.

More often than not, the absolute dollar amount of 1) rent, and 2) expense pass-throughs is the measure used by companies to determine their occupancy cost. This measure misses a number of other pertinent factors that are critical to company health and profitability.

The Bigger Picture

The silo approach used by some firms factors rent paid, utilities, real estate taxes and other occupancy-centric expenses as their only occupancy costs—this widely misses the mark.

With the increase in financial metrics software provided by companies such as ProLytiX, firms are constantly benchmarked against their peers on far more than normal operating financials such as Revenue, Gross Margin, EBITA, ROE and P/E ratio. For a true judge of a company’s underlying economic engine, investors look to other key metrics that judge effectiveness and productivity by using headcount ratios which include the following:

- Revenue / Employee

- Gross Profit / Employee

- SG&A Expense / Employee

- EBITDA / Employee

- Market Capitalization / Employee

Leading managers are keenly aware of their competitive position against their industry peers and seek ways to increase both their competitive position and the underlying economic health of their company.

Facilities and operational assets don't create new products, make sales, or find new customers; only your people can grow your business in such ways. From a cost standpoint, the impact of human capital is immense. Payroll and benefits typically account for 35 to 40 percent of operating expenses. In sheer volume, improvements in efficiency can have a dramatic impact on the bottom line.

Clearly a company’s human capital holds the key to success or failure. Strategic investment in these areas has the highest potential financial impact for knowledge-based companies. Occupying an environment purposefully designed with these goals in mind should be an absolute mandate on the path to capturing and maintaining industry leadership.

Review the Occupancy Cost list below and put a numeric value on these metrics.

Rent

Occupancy Costs

o Operations and Maintenance
o General and Administrative
o Real estate taxes
o Insurance

o Utility Costs—Electric/Water/Gas

Staff Turnover

o Interruption in responsibilities
o Lost clients
o Lost ideas / knowledge
o Lost intellectual property
o Downtime until new hire
o Recruiting costs
o Training

Absenteeism

o Employee spread of colds/flu

Thermal Comfort

o Too hot / too cold complaints
o Noise and pitch of HVAC units

Churn Costs

o Interior reconfiguration
o Wiring – phone/electrical/Cat5
o Staff time in moving

Indoor Air Quality

o Insurance and medical costs
o Sick Building Syndrome symptoms
o Litigation costs
o Workman’s compensation
o Remediation / business interruption

Organizational Costs/Gains

o Product time to market
o Organizational image
o Litigation costs/savings
o General productivity
o Goodwill

For example, recruiting costs typically run 15% of a person’s salary and it takes at least six months for a new hire to get up to speed. In addition, management time and resources are devoted to training and integrating the person into the organization.

Factor in the costs associated with the departed person which can include lost client relationships, dropped responsibilities, lost business development initiatives and ideas, and the cost of turnover becomes more than significant.

An interesting exercise is to examine the seasonality around absenteeism and consider where people got their last cold/flu as many times the same illness passes multiple times among a work group. The number of fresh air exchanges per hour, HEPA filtration, and other ways of achieving indoor air quality have a strong correlation with the spread of contagious disease among office colleagues. The variance of these metrics across even Class A office space is shocking.

Thermal comfort is an issue not to be taken lightly. An eight hour workday is comprised of 480 minutes. A person who spends six minutes per day going for a walk to warm up or otherwise dealing with the fact they are too cold, or breaking/refocusing concentration from the noise of the HVAC system overhead kicking in wastes 1.25% of a day.

The too hot / too cold complaint is the largest occupant issue as reported by BOMA; eliminating or reducing this distraction can have an immediate productivity boost.

There is the tendency to fall into the “esprit de corps” trap classifying the poor performers (aka ‘slackers’) as the ones on the turnover or absenteeism rolls. This idea falls by the wayside once an organization loses key salespeople, R&D staff, or even executive assistants.

The clear challenge is to create an environment that supports communication, idea generation, health and well being, and demonstrates that the organization values its most prized assets.

Green Building Advantages

Productivity is a complex concept comprised of many factors. Human resource policies, management leadership and motivation ability, the specific industry’s macro- and micro-economic factors, and company culture all play key roles. Bad managers and bad policies can cripple morale and create a revolving door making any facility investments futile. A building by itself doesn't create productivity—but the physical environment sets the stage for an organization to maximize its people’s skills. A good environment trumps a poor environment every time.

A green building developed with sustainable design techniques and features makes for a most compelling scenario. The US Green Building Council’s LEED rating system covers many aspects of indoor environmental quality with 32 of the possible 69 LEED points having to do with indoor environment quality (15 points) and energy efficiency (17 points).

The tool provides developers, designers, and contractors a guide to create high-quality, high-performance environments for a building’s tenants. The LEED system is also being used by smart tenants who understand the benefits of green design and are looking for a competitive edge when in the market leasing space. Knowing how a building measures up to the LEED criteria is the first step to understanding how the space you occupy can be used as a tool to harness the power of your most valuable investment.

The bottom line in sustainable design is that it puts more horsepower into fundamental good building architecture and engineering. Maximize natural resources like sun and wind, let in daylight, use non-toxic materials then strive to keep the air clean, minimize energy consumption, and don't waste water.

How does your building measure up?

Related Advice:

• Green Productivity Gains: What's the ROI from Indoor Environmental Quality?



• Commercial Green Building Lease: 9 Provisions and Guidelines to Consider



• Indoor Environmental Quality: Quantifiable Improvements in Worker Productivity?