Costs, revenues and (added) value of the learn/work environment are directly or indirectly reflected in the annual accounts (balance sheet and profit and loss account) of an organization. With the help of the DuPont analysis, a business-economic analysis of the annual accounts can be made in order to provide insight into and discuss the influence of accommodation on the (economic) return of the assets.
This involves gaining insight into the effects that learn/work environment decisions can have on financial management, more in particular how accommodation (Real Estate / Building, Facility Management and ICT) can be used as leverage to improve learning results, working conditions and cooperation between employees and/or co-users.
Does the price of real estate equal the subjective worth attributed to it, or is the worth of the object the same as the (market) value? In ordinary language: is the worth of real estate similar to whatever you can get for it? As opposed to the Dutch language, the English language makes a distinction between price and value by the use of three different words, value, price and worth.
- Valuating – Process of determining the market price.
- Market price (value) – Estimate of the price the property can fetch on the market at this point in time.
- Price – Actual trade price in the market.
- Valuation -The ‘best’ estimate of the actual market price by an expert.
- Appraisal – Process of estimating the intrinsic value for an individual or a group of individuals.
- Intrinsic value (worth) – Personal (subjective) estimate of the intrinsic value by the party/parties concerned.
- Added value (value for money) – The independent simulation of the weighing process of the real estate players in determining their intrinsic value.
The price is the only thing that really exists, for it is the amount mentioned in the tender brochure or in the lease or sale contract. The value of real estate does not exist, for it is an individual and therefore subjective estimate. The worth is the subjective intrinsic value that differs for the owner and for the tenant.
Comparing two buildings is to compare apples with oranges: it is easy to find the differences at first view, but difficult to decide which building would best fit a specific user or target group.
Usually, the question whether the user is satisfied with a building is asked afterwards, instead of simulating the consequences of certain accommodation decisions in advance. People evaluating a building often are re-inventing the wheel. They drown in technical details. An accommodation evaluation is useable only when it is related to a description of the needs of the user on the basis of their primary process.
Therefore, the accommodation consequences must be filtered out of the policy plan or business plan. What kind of work processes are taking place inside the building? What are the requirements for the effective and efficient realisation of these processes? What kind of changes are to be expected in the future? Once the functional accommodation requirements have been determined in this way, they serve as a reference for the accommodation evaluation.
Fitness for use is about the needs and requirements of an organization as a whole and the individual user requirements of the employees in particular. Within the framework of the social preconditions such as legislation, standards and economic criteria like time and money.
Both the operation costs of the owner, to maintain the real estate, and the facility expenses of the user, to enable the actual use, should be taken into consideration. This exceeds a common valuation of real estate.
The owner and/or the user not only acquires improved insight in the financial value, but also in the operating value of a real estate object for a specific type of use or target group.
Usually, a property valuer focuses on the financial market value and to a lesser extent on the operating value. The most common manner of valuation is based on comparison. According to the market, what is or could be the price of a more or less similar object?
For the price is not a function of supply and demand only . When the price is based on intuition and the checking of aspects, and when the intrinsic value is not included in the appraisal, a valuation results in an educated guess.
Each person has another view of the future. The answer to the question: “How much do we have to pay?” usually is based on expectations of the future by third parties.
However, the answer to the question: “Should we buy it?” per definition is based on one’s own estimations of the future. In order to arrive at the correct policy decisions with respect to accommodation and/or real estate, the decision-maker should become familiar with the sensitivity of specific input data and assumptions of the intrinsic value and the market price of the real estate. In a perfect market where everybody has the same information available, price and value should be identical.
Being able to have at hand a curriculum vitae listing the major data on the real estate object creates an opportunity to draw up a sensitivity analysis of the strengths, weaknesses, opportunities and threats (SWOT), on the basis of scenarios. By modulating and simulating different scenarios, one’s own specific real estate strategy can be substantiated.
The DuPont analysis or DuPont Model was developed in 1919 by the American chemical group E.I. du Pont de Nemours and Company. By using the DuPont analysis, it is possible to schematically show the influence that balance sheet and profit/loss items have on profitability. DuPont analysis is a useful technique used to decompose the different drivers of return on equity (ROE). The decomposition of ROE allows to focus on the key metrics of financial performance individually to identify strengths and weaknesses to create information needed to prioritize investments and improve business performance.
The DuPont analysis is therefore a simple way, based on the actual annual figures of an organization, to simulate the positive effect on the (financial) return by increasing revenues, reducing costs and/or decreasing invested capital. Conversely, the negative effect of a particular measure can also be simulated so that financial consequences do not come as a surprise. It helps to find a balance between effectiveness and efficiency.
Accommodation has both benefits and costs. Direct financial income from accommodation is only available in the event of the sale of real estate, shared use and/or (sub)letting of space. It goes without saying that sales revenues are only incidental revenues. Like your table silver, you can only monetize it once.
Indirect contributions of accommodation to the value creation process of an organization, such as an increase in the productivity of employees and the learning performance of students, cannot be directly deduced from the annual accounts. Nor is this the case with marketing expenditure. People sometimes say half of the marketing budget is wasted money, we just don’t know which half.
On the basis of the DuPont analysis, the possible effects can be simulated with the help of what-if scenarios within the context of the own strategic organizational goals. In this way, the added value of the accommodation interventions can be quantified in a value case.
Accommodation has both a direct and an indirect effect on the cost structure of an organization. In the case of ownership, direct costs are, for example, interest, repayment, depreciation on previous investments, allocation for major maintenance and operating costs.
Operating costs include matters such as levies and taxes, insurance, energy and water, cleaning, minor maintenance, garden maintenance, surveillance/security.
In the case of rent, the above costs can be reduced to the rent and the service costs.
Often there is also a collective item ‘other accommodation costs’ with various incidental and recurring costs attributable to accommodation. Such as ICT, relocations, facility costs and facility personnel.
Value creation with the learn/work environment consists of:
- Direct income, through sales (positive difference between book value and sales price) and through rental income (shared use and/or rental to third parties).
- Direct cost reduction, by reducing the number of square meters of floor space and/or reducing occupancy costs per square meter of floor space.
- Indirect benefits, because the learn/work environment positively influences the return from the primary process. Plus contributes to achieving the sustainability objectives as part of the social return.
- Indirect reduction in total operating costs (excluding occupancy costs) through a more efficient and effective learn/work environment for the education process.
The strategic organizational goals are by definition unique to an organization. The Strategic Alignment Matrix® helps you map out your own strategic goals and make the link to accommodation (Strategic Accommodation Roadmap). Subsequently, interventions in the accommodation are derived that contribute to adding value to the organizational goals.
Accommodation influences the four strategic management areas mentioned in the Strategic Alignment Matrix: Finance, Operation, Sales & Marketing, Human Resources and thus (also) has an indirect effect on the operating costs of an organization. Accommodation contributes to the economic goals: Finances – Primary process (What can the building do?), And to the social goals, Communication – Personnel & Organization (What does the building do to you as a person?).
By calculating the quick wins using accommodation scenarios, the optimal balance between the four management areas of value creation can be determined. The DuPont analysis can be used as a simulation model to explore the financial effects.
A quick scan often yields surprising results. Results that can sometimes improve the learn/work environment in an instant. By simply making accommodation more congruent with the business style (management style and culture) or the education concept.
In this way, adaptations to accommodation, however small they may be, can positively help and / or support development and change in a team. You see the accommodation changes, you notice it, you feel it, you experience it, so concretely that people start moving.
A building as a strategic means to achieve the strategic goals. An additional advantage of these adjustments or changes in or to the building is that they communicate well to all stakeholders. And what about other positive effects. What effect would a pleasant congruent building have on the quality of life and learn/work performance? The absenteeism? Have you ever made that calculation? You will be surprised how this will affect the results. Not only on learn/work performance, but also financially.
See also Real Estate General Performance Survey (RE-GPS) with the Dutch webinar “Inspiring Workplaces that Promote Value Creation”, for an application of the Real Estate DuPont Analysis.