Property Internal Charging – end of the “free resource”

The age of property as a “free resource” in large organisations, owned and managed by “silos” is rapidly disappearing. In the current austere climate, it is now imperative that Occupier Departments and their management teams fully understand the value, impact and are accountable for the cost of holding and occupying space not only to their department or service but to their Organisation, or in the case of public sector the tax payer.

UK Government created a centrally run property vehicle in 2010 with the aim of centralising the ownership and management of its disparate office estate. The idea was that control of all Central Government offices would transfer from individual departments to the Government Property Unit, and these Departments will then act as client tenants, each having to request property from the portfolio based on its needs. It was anticipated that up to £5bn on annual property costs would eventually be saved using this model. However, according to the National Audit Office report Improving the Efficiency of Central Government Office Property real progress has been thwarted by an inability to breakdown Departmental “silo mentality” and vested interests.

Centralising ownership and management of property is an essential first step to extract value and efficiency from the government estate. Alongside this there must also be a critical focus on utilisation of and needs for office space in the future. This will require challenging, understanding, managing and matching the real occupation requirements across central government – taking account of reduced numbers, focus on workstyles, new service models, IT investment, agile ways of working and capacity for shared resources, not to mention new economic realities.

Martin Read, author of the Operational Efficiency Programme confirmed that UK Central Government uses 30% more office space per head than dictated by best practice and that: “this inefficiency needs to be addressed much more urgently. Property assets should be managed separately and user departments charged for the space they use. This would focus minds on the efficient use of resources”.

The fact that the total UK public sector estate is valued at £370 billion, with an annual running cost bill of  £25 billion and carbon emission of around 20 million tonnes (8 % of total non-domestic emissions) emphasises the scale of the problem to be addressed, but also the potential opportunities through better management and governance, understanding need, and occupier education.

Setting standards and workplace guides and Benchmarking against best practice cost and utilisation metrics are certainly useful tools in promoting better space management standards.  The OGC (now incorporated into the Government Property Unit) working in conjunction with IPD put in place a methodology based around the IPD Cost Code for benchmarking the performance of buildings across the central government estate. This is structured around a set of related key performance indicators which allow for the measurement of efficiency, effectiveness and environmental sustainability performance of individual buildings and against benchmarks from the private sector.

Many argue that benchmarking property performance monitoring is enough, perceiving internal property charging merely as ‘funny money’ – passing from one hand to another and creating unnecessary bureaucracy. Benchmark comparisons are not necessarily straightforward, often based on widely differing information – classification, measurements, property types, ages, locations sectors and users. However, organisations like IPD and the Leesman Index are leading proponents in bringing standardisation and structure to office space management and utilisation benchmarking practice.

Benchmarking is principally about defining and measuring CRE performance. Indeed, benchmarks often end up in league tables, and although such competitive spirit can be helpful in aiming high what is additionally required is something that will focus real understanding of space and property need based on commercial parameters in the space consuming teams and Departments. The argument that benchmarking is enough ignores this key need for occupier users to understand the true cost of their space acquisition and utilisation decisions, rather than hiding this under a corporate umbrella.

The Westminster Sustainable Business Forum Report on Delivering Effective Estate Management in Local Government found considerable evidence of poor utilisation of public property, costing money and adding to carbon emissions. The report explained that the space most Local Authority service directorates use is generally granted to them as a “free good” and that property cost is not reflected in their budget but covered by the overall Corporate property budget. “As a consequence service directorates do not fully recognise the cost of the space they occupy and (are) not motivated to use it more efficiently”.

However the report did find and recommend examples of good practice such as Manchester City Councils introduction of centralised control over its property assets which has enabled the Council to release around 30% of its estate achieving considerable financial savings. It highlighted that the Manchester experience “shows that an important part of this process is to introduce an internal charge for the space service directorates use to make them aware of the cost of space they occupy”.

The Council initially introduced service directorate recovery charges reflecting the actual expenditure for the use of properties leased from third parties, supporting the Councils strategy of reducing leasehold commitments. The second step involved the introduction of “notional charges” to the rest of the space occupied by service directorates, which in effect become real internal rent charges.

Internal Property Charging was originally on the radar as a key Government cost control and saving initiative, but unsurprisingly it appears to be finding few friends from entrenched “Civil Service” opposition who fear losing their fiefdoms! The Departments argue that they should have free range to manage “their property” to ensure the right “fit” for them. Why should property teams force business units into buildings which do not work for them simply to meet Corporate property cost saving targets.

However, the assets are ultimately owned by the Organisation and therefore capital decisions should be taken out of this singular equation. Who takes the long-term view for the organisation, and who is looking at the bigger picture? At the heart of all successful Corporate Property Strategies are effective governance, organisation and understanding requirements of the Organisation and the component parts of its operational business. The ability to engage across the Organisation and manage and meet the optimum holistic property and space needs to meet a diverse range of Departmental requirements both in the short and long term is a central role if inefficiency and waste is to be avoided.

My experience at BT Property leads me to the conclusion that gaining Board commitment for “The Property Team” to take a strong role in “controlling” space through centralised management of property is essential for large occupier organisations. This  supported by the use of property benchmarking and more importantly some form of internal property charging is certainly the most effective direction for Public Sector to follow to sustain ongoing commitment to property optimisation and efficiency.

BT managed the ongoing downsize of its massive estate by millions of square feet and running cost savings amounting to more than £500m pa over the last two decades. This was in no small measure due to the role of “internal property charging” and “internal customer account management” which focused Departmental user attention on the cost and value of their occupation, and also the potential benefit opportunities this revealed.  It was particularly effective when the FD accounted space costs as a Departmental “below the line” P&L” (profit and loss) item.  Space was no longer treated as “free” or “wooden dollars”– it now hit their bottom line and bonuses which ensured their enduring commitment to space efficiency!

Internal charging is also an education and identification process. It will create understanding that property is not a “free resource” and it will also focus Departmental attention on “their own” cost base. At the same time it can provide impetus for corporate shared service  and “Total Place” plans as well as introducing agile working and ultimately portfolio re-alignment and rationalisation. More importantly it will also ensure that management at all levels across the Organisation understand not just the cost but the value of property and space to their business performance or service offering – something that is often hidden in centralised accounts in large Corporations.

Many Departments in large organisations still treat property as a reactive resource. Short term pressure and “operational decisions” to take new or expanded space or property often fail to see the long term implications which are not in the vision of departmental decision-makers. They often have no real responsibility for the impact of long commitment periods in leases for rent, rates and running costs including maintenance, plant replacement and service charge liabilities as well as eventual dilapidations.  Internal Property Charging can help better inform this decision-making with commercial cost transparency and awareness as well as visibility of the departmental commitment.

In some organisations external requirements may create a need for transfer charging. For example, some regulated Business Sectors recharge, particularly in multi occupied buildings to ensure full transparency to the regulator to cover potential cross subsidy, and pricing issues. In other businesses it may be necessary for tax purposes where different Group operating companies share space, while in state funded sectors there is an increasing need for visibility and accountability to the “public”.

Many large corporates either already operate or are considering introducing some kind of internal charging regime with schemes based on either actual, notional or “budget” figures and typically based on m2 units of space occupied. However, different organisations approach internal charging in different ways with different supporting mechanisms, rules and procedures to reflect their own drivers, culture and required outcomes.  The Property Director of a major Utility company commented, “we are considering moving to some simple form of recharging shortly but there is probably no one right way, it pivots off the corporate culture and how behaviours are best reinforced”.

Accenture for example, operate two charging mechanisms: one is an overhead charge for the use of their London offices which is levied at a corporate level to all the potential users of the space. The second is on a price list method of charging actual costs back to the user – for instance if someone wants to work from a Regus office in Blackpool the charges for that team are simply charged back to that team. Where the user does not attract the overhead space charge this is a reasonable mechanism for the user to pay for what they use. If they are included in the overhead charge they will end up paying twice. This effectively discourages the people who are eligible for the overhead charge from doubling up on space.

At Cisco, cost allocation is set up such that occupiers pay for the space occupied in large campus locations. For sales offices the same principle applies however the sales division also pay for the empty space in these locations. The reason for this is that the sales division drives the strategy for these locations and by making them pay for the empty space it drives more accountability.

Although “internal rent” or accommodation charging regimes can often be bolted onto or make use of existing asset management systems, it is likely to require some investment to set up. Standard Chartered Bank for example are systemising their accommodation reporting linking up their people soft system  with their space CAD system and are rolling this out globally. Once established the process can provide an ongoing indispensable strategic tool that will significantly repay the initial investment for owners occupiers or tenants of large office estates.

The BT system was not without its problems but eventually the right focus and rules engendered the desired behaviours and outcomes. Indeed, whatever the driver for internal charging, it must be recognised that there is a danger with these regimes, as some of its critics point out that organisations can become “obsessed with detailed charging, turning the process into a self feeding bureaucratic cottage industry”.

Nevertheless such regimes can if focused correctly, control direction and manipulate behaviours, as well as provide encouragement and evidence to the organisation to deliver an optimised estate. It will also support the major property cost transformation that many large organisations are currently pursuing in the search for “more with less”, both in immediate plans but particularly for medium and long term strategy. They also have the opportunity of being expanded to incorporate the next big CRE Agenda item, “internal carbon charging”.

Paul Allsopp, The Agile Organisation
Member of the Workplace Change Organisation (WCO).


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