Corporate Real Estate and the Bottom Line
Facing shareholder pressure to improve profitability, major banks must look beyond layoffs for new ways to reduce operating expenses and boost productivity. Corporate real estate – including both the administrative facilities and the retail branches that banks occupy – is where some are finding ways to not only improve the bottom line, but to boost top-line revenues through new retail banking strategies. Banks that are able to view their facilities as strategic investments in internal workforce productivity and external customer service delivery will be best positioned to achieve improved top-line results.
According to a survey of Jones Lang LaSalle’s annual Banking Forum participants, bank executives are focused on achieving the maximum return on investment in assets, people and space.This focus represents a change from the traditional cost-center view of real estate, under which cost reduction was the only priority. While cost reduction is still important, banks now must consider multiple factors as they maximize their investment in their institutional facilities.
Technology adoption will be critical to many banks’ drive to remake their corporate real estate strategies. While banks have long used sophisticated customer relationship management (CRM) and back-office technology to manage their financial operations, forward-looking institutions are also using technology to boost the efficiency and productivity of their facilities. To manage operating costs, for example, some banks are using cloud-based “smart” building management systems that remotely manage building operations to minimize energy waste.
Another priority is proactive planning and forecasting. Nearly all the Banking Forum survey respondents expressed a heightened need to get ahead of business unit planning with regard to real estate needs. Looking ahead, the most successful corporate real estate executives will be “space prophets” for the business units, using sophisticated modeling and forecasting tools to project various scenarios for facilities utilization.
Toward this aim, some bank real estate executives and CFOs already are adopting portfolio management tools that can, for example, help them determine the productivity of their facilities, and assess whether and where space is needed for management, general administration, call center operations and back-office functions.
As a result of advances in technological tools and new thinking, we predict that space allocation per office worker will drop from about 200 square feet today to an estimated 50 to 100 square feet per person in the future, dependent upon the industry sector and function. Banks, therefore, have an opportunity to generate significant cost savings if they can use their facilities more strategically.
Mobile workforce technologies, such as tablets, smartphones and videoconferencing, are at the forefront of changes related to where and how bank employees work. While not new, worker mobility programs have been pushed to the top of the agenda as a tactic to lower occupancy costs, achieve sustainability goals and increase employee productivity.
When asked to identify the largest cost savings opportunities for corporate real estate over the next five years, Banking Forum survey respondents selected worker mobility programs as the greatest opportunity, followed by portfolio rationalization and more accurate tools for forecasting space demand. More than 40% of Banking Forum respondents expect 16% to 30% of their U.S. workforce to be enrolled in a mobility program by 2013.
Many institutions are also taking a close look at their branch network real estate. A typical bank’s portfolio varies enormously across size, location type, traffic flow and brand identity. However, these variations are not necessarily the result of strategic portfolio management or methodical site selections.
Where branch expansion was a given during the housing boom, branch networks have been shrinking since 2009, according to Celent data.Facing a confluence of regulatory, legal, economic and competitive challenges, combined with the growing adoption of mobile and online banking channels, the “branches everywhere” model of the past is neither effective nor affordable.
Industry consolidation has only exacerbated trends that began with the emergence of mobile banking and are fundamentally altering the size and structure of bank networks. As predicted in Jones Lang LaSalle’s Global Retail Banking 2020 study, up to 50% of branches in U.S. bank networks may ultimately be declared obsolete, although not necessarily defunct, by 2020. Clearly, the age of the sprawling branch network is drawing to a close. Yet, the opportunity for realizing increased revenue potential by investing in retail banking real estate remains. At this point in the retail banking business cycle, strategic real estate optimization and investment in a bank’s branch network can make a profound impact on future overall bank performance. Given that branches constitute 75% of a bank’s total distribution costs, according to Capgemini, implementing smart retail real estate strategies will be a critical part of boosting bank performance.
Bricks and Clicks
While many branches will continue disappearing as leases expire and long-term plans call for overall contraction, banks have too much depreciation left in their branch assets and contingent liability on their balance sheets to afford the wholesale disposal of branches. Furthermore, even if mobile technology and non-traditional competitors displace some services from physical branches, consumers will always want both convenience and the ability to interact with their bank on a personal basis.
Following the experience of other retail sectors, many U.S. banks will need to adopt a mixed “bricks and clicks” strategy to succeed. Branches will likely remain the cornerstone of the typical bank’s retail sales and service proposition, but branch formats and networks must recognize the widespread consumer adoption of mobile and online banking.
Like other types of retailers, some banks have begun to use sophisticated site selection approaches based on customer analytics, lifecycle analysis, segmenting and demographics – parameters far beyond good visibility and access. Retail banking site selection now encompasses not only branches, but also anywhere that banking services can be conveniently provided to consumers. Whether that means providing a service kiosk in a train station or a premium branch in a business district, proximity to targeted customers ultimately matters more than having a traditional façade. Flexibility and agility will provide a competitive advantage for banks with the operational wherewithal to provide, for example, a “pop-up” bank in a temporary location.
Some banks already are exploring the hub-and-spoke network model. Flagship branches in major markets can offer the most sophisticated products and services, while smaller satellite branches will provide access to basic banking services, possibly supplemented by call-center videoconferencing to provide a human touch without the cost of a full-service branch.
Taking another page from the retailer playbook, some banks are applying their deep customer intelligence data to the deployment of branches. An increased focus on customer segmentation and analytics is having a direct impact on not only how and where branches are being established, but on the total branch experience.
Yesterday’s “branches everywhere” approach is being discarded for highly selective site selection based on deeper analyses of micro-markets and target customers and more thoughtful considerations of what constitutes a trade area. Bank of America, for example, is converting some of its branches in Washington, D.C., and Los Angeles into “specialty stores” where high-value customers can get expert advice on mortgages, small business and investing in addition to traditional teller services.
Those “deluxe” branches will focus on selling to high-value customers in locations in which those high-value customers are concentrated, while low-value transactional customers will be guided to ATMs, direct channels or even entirely cash-less branches. For small and remote branches, some banks will likely create high-tech centers with minimum on-site staff, but high-touch service available through 24-hour call centers accessible via videoconferencing.
The move to a cash-light society will trigger still more changes in how branches are deployed. Since the size and configuration of a retail bank branch traditionally has been conditioned upon the number of teller points at the counter, radically fewer cash and coin transactions will inevitably reduce branch size further. Branch design will continue its shift from a focus on teller counters to a focus on sophisticated ATMs and other technology-enabled service delivery channels.
As banks seek to gain market share through new products, services or markets, they will be tasked with getting ahead of these business unit strategies. Best-in-class corporate real estate teams and their institutions will be defined by their ability to proactively plan for and execute real estate solutions that support long-term business goals.