The Collapse of Commercial Real Estate

Are you waiting for the next shoe to fall and are sure it's going to be Commercial and Corporate Real Estate? If so, you are in the majority. If so, I think you are dead wrong. You have missed the bottom of the commercial real estate market which I suggest occurred about the end of the second quarter of 2009. There have been a number of signs, not the least of which is a four percent average price increase of commercial real estate prices in the third quarter.

Banks who hold debt have been renegotiating loans like crazy. Everyone has a story about a commercial real estate borrower who got a "kick the can" response from their bank. Where this has happened the terms of a final principal and interest write down is postponed for a few quarters. But they have done two things when they have. First, they have relaxed repayment terms significantly. Second they have provisioned for losses often exceeding that of a future renegotiation.

The PricewaterhouseCoopers' Korpacz Real Estate Investor Survey for the second quarter predicted a market turn around in 2011. Their third quarter edition now predicts a turn around in mid 2010. In the first quarter they were predicting three more years of price declines. This survey while interesting and exhaustive in its market coverage is the ultimate rear view mirror picture of the market. If consultants always think about the future and accountants always think about the past, it is no wonder why the CPAs bought Korpacz. This survey is reliably the best commercial real estate contra indicator I know of.

People have been raising lots of money to buy distressed commercial real estate assets. Their problem is there are few properties for sale at the current distressed prices. Look for prices to move quickly when these funds run out of patience.

The administration has issued REMIC rule changes which were announced by the IRS and the FDIC to make workouts easier across CMBS barriers. Full story here. It's hard to say if this will lead to a new wave of loan modifications but it will at least prevent distress pressures from building. Security prices have already collapsed. Security holders are well prepared to ultimately accept lower payouts. Tranche class warfare will erupt but this will hardly impact commercial real estate asset valuations.

There are many other signs out there. Have a favorite of your own? Please email them to me at richardlellisjr at gmail.com and I will include your insights.

GARP meeting observations

I have decided to write my blog posts more often. In the past I have started writing long and thoughtful pieces. Then they sit unfinished on my desktop waiting for me to get back to them. I will now write shorter posts on ideas that strike me as insightful and spend less time editing them for perfection.

If you are a risk manager or want some insight on evaluating your firm's risk vs reward balance, The New York City chapter of GARP the Global Association of Risk Professionals holds monthly meetings that are interesting, easy to digest and not overly technical. The theme of the September 24th meeting was how did China come out of the financial crisis and what financial muscle will they flex now. China has a different and mostly separate financial system. Our financial system just had a major shakeout, China's didn't. As several of the presenters spend their professional lives doing business with China, one can forgive them for spending a bit too much time stating the obvious as revelation.

There were a number of takeaway conclusions from the evening. The most glaring is China's inevitable shakeout and restructuring is some years in the future. The birds are singing even more loudly in the trees than even last year. China has the world's largest sovereign wealth fund. Conclusion, the government has all the money and the people are mostly still poor. The Chinese market generates the best risk adjusted returns in the world. Conclusion, historical time horizon is way too short. The market in China consistently under prices risk.

All risk models work. The ones that work the best are widely adopted. The greater the adoption rate, the more the model itself affects the market and the bigger the break when it fails. Don't take models too seriously. They attempt to describe possible realities but they are not themselves reality. With good models you can still go out of business. It is always prudent to take models with a grain of salt.

When markets crash the only thing that goes up are correlations. VaR estimations that incorporate the benefits of hedging are likely to be wildly optimistic.

With the elimination of fixed commissions, the only way to make money in trading markets is huge volumes on narrow spreads or lower volumes with wide spreads. Huge volume trade strategies are particularly vulnerable to liquidity traps. Wide spread markets rely on pricing and valuation opacity. Opaque markets are increasingly under attack from burned customers and will become more difficult to create going forward.

I sensed a general frustration with managers latching onto VaR as the one metric answer to describe a firm's or portfolio's market risk. Presenting a single value rarely conveys much information. Managers know this but often do not have the vocabulary to describe risks to their superiors or ask appropriate questions to the presenters. As a result, risk managers have been left feeling their warnings are not being heard. The problem is less technical than it is psychological. Listeners want to hear the bottom line and people who are good with mathematical models often have difficulty properly communicating the limitations of their analysis to decision makers. This problem is not going to get better as long as companies hire and promote technical specialists rather than more articulate multi talented individuals.

Killing the goose who lays the golden eggs

It is sad the US automobile industry has reached this point. For too long management has not been able to freely make decisions about production methods, staffing and plant operations. This has lead to a slow loss of market share, quality advantage and margins. Unfortunately, GM will not be healthy until the stakes and influences of the current stakeholders who brought us here are removed from company decisions moving forward. The productivity of the American worker is still number one in the world. Our highly skilled and imaginative workers, if given the opportunity, will once again raise General Motors to be the envy of the world.

When will the so called Credit Crisis end?

A risk professional I respect asked me this question last week. On the way home, I thought about his clarifier “so called”. He well knows we are experiencing a shortage of the availability of credit. If professionals can disagree what to call what is happening, how can the public understand what is hurting home prices? Is this a Credit Crisis or some other kind of market failure?

The current credit shortage is different from classic credit crisises of the past. Credit professionals are comfortable with how Credit Crises work. They know what causes them and how the economy, with the help of the Federal Reserve, work them out, even if we are forced to suffer a recession in the process. We may not like living through them, but we can see into the future when they will end.

A Credit Crisis occurs when lenders sharply cut back on new lending and renewal of existing credit. Remember, banks borrow short term and lend long term. When lenders make loan origination decisions, they do not know the profitability of the loan for many years as the loan is paid back. Besides the financial and market risk calculations, professional judgment introduces emotional influences into the decision process. As lenders look far into the future for their returns, they can become skittish when circumstances change. Bankers are no different from the rest of us.

To make a loan decision, lenders need to convince themselves that the opportunity of their expected margin over the life of the loan is greater than the risk of not being paid back. The margin is the difference between the interest rate lenders charge the borrower and the lender’s cost of funds. Lenders cut back on extending credit when their analysis shows they may loose on the loan. The shift from aggressive lending to greatly tightened credit standards can happen abruptly. The cause is usually an external factor, such as an increase in short-term interest rates causing a narrowing of the interest margin they can command. Another example is an inflation shock caused by, say, a sharp increase in energy prices. The trigger is always different but it is something that causes a change in the interest rate view by bankers.

This time the crisis did not begin with banks curtailing their mortgage lending. It began when the funds the banks and mortgage brokers depended upon dried up. How this happened is because, this time around, there are many new players involved in the mortgage, and other lending markets. In the past banks made loans, either directly or indirectly through mortgage brokers. Banks would either keep mortgages and fund them internally or bundle and sell them to investors. The market they used to sell their mortgages was the CMO or Collateral Mortgage Obligation. CMOs have been around for a long time. Buyers of CMOs thoroughly understand the risks and obligations they create. CMOs still exist and are still a major source of mortgage funds. In this market cycle, new types of securities including CDO or Collateral Debt Obligation were created to give lenders a wider source of funds. An innovate feature of them laid the seeds of this crisis. The risk of a mortgage's default is split up into tiers and separated from the cash flows from borrower's payments and from, most significantly, individual mortgages themselves. The details are unimportant to this discussion, but suffice it to say, there are now multiple investors involved in each mortgage. The problem is how to get everyone together to make reasonable decisions on how to deal with loans where the borrower has trouble making payments.

A simple example of slicing up an asset is the time-share condominium. There might be 52 owners, one for each week in the year. Management decisions are made by a firm who runs the complex, sometimes not in the best interest of the true owners. At least in this case, a manager manages the facility that can prevent things from spinning out of control. Time-shares had serious growing pains of their own when first introduced. This market is stable now but, in the early years, many investors lost money.

In the end, buyers of these new securities did not fully appreciate the risks of investing in them. The proximate cause of this credit crisis was the discovery by the market that sub prime loans had been mis-priced. The web of players was so convoluted that buyers, to a greater extent than they should have, relied upon the valuation / risk opinion of others. Securitization encouraged new players to indirectly enter the mortgage market. When buyers realized their loss risk was likely to be much higher than they were told, the securitized funding stopped cold. Security holders are in the mode of disposing of risk, rather than purchasing more. Fears about counter party risk have adversely affected other credit markets where banks obtain funds. There is no short-term fix to these investors’ woes.

This crisis will end when the risk reward evaluation by lenders tips again toward reward. This can happen when their cost of funds decline, thereby increasing lender’s interest margin. Only time will allow the excesses that have built up in the market since the last Credit Crisis work themselves out. Do not expect a quick bounce back of the residential real estate market. The purchasing power CDOs gave homeowners to bid up home prices over the last few years will not return. Prices will need to seek a level where home buyers can afford them with traditional bank financing.

There are bright spots on the horizon. Banks will return to the market. They are not short of liquidity and short-term rates are low and moving lower. They are short of capital but have moved quickly to shore themselves up. Banks have all the tools to jump back into making residential loans as home prices stabilize. With all the help the Federal Reserve and congressional legislation is providing, banks will move before the home market completely bottoms out. This will help soften the blow. An unintended consequence of this is likely a very long period of stagnant home prices. However, that will have to be a discussion for another time.

Please read my entire blog here.

Attributes of the Successful Consultant

Group Dynamics Keep your focus on accomplishing the task at hand rather than your personal status within the hierarchy of the group. Building relationships within a team is more important than asserting oneself into the group leadership position. The goal is for individual team members to work on tasks they are best at. Effectiveness within a group is built on establishing personal creditability. This is accomplished by actions. People judge us more on what we do than what we say. Group leadership will evolve as the team matures. Read this on team development. Listening skills are crucial to working well within a group. Groups are formed to exchange information and pool expertise. They are not forums to show everyone how much you know. The goal is to solve problems and you very rarely learn what you need to help solve them when you are talking. I work well in a team.

Communications I am excellent at explaining concepts and tools to people in a context they can understand. Teaching others what I know and how things work is something is a natural skill of mine. I also like to give honest, useful advice. I always tell the truth. Unless it is true, I do not like to tell people only what they want to hear.

Problem solving Identifying optimal solutions take time. One must be highly organized and take a methodical, structured approach. Explore every identifiable avenue to reach the best possible analysis. Processes and people can unintentionally obscure root causes. If the answers to client’s problems were easy to spot, they would have discovered them already and not called in a consultant to fix them.

Mobility The consultancy world involves travel. Being able to keep up with the schedule, hours, sleep disruption and pace are crucial, but not sufficient, to being an effective road warrior. One must be comfortable working with different people, in changing venues, using whatever tools are at hand. Inability to deal with travel is the number one reason professionals leave the field. But travel brings us to exciting new situations, clients and their problems to solve. Like most successful consultants, I become energized when I face these opportunities.

Personal enrichment The tools of consulting are constantly evolving as new tools prove their value and effectiveness. Technology and change management methodologies are continually improving. Learning new techniques and applications is an essential element of a successful consultant. I love exploring new subjects and mastering new skills. While consultants will recognize this is an obvious characteristic, not everyone feels this way which is one reason why consulting is not for everyone.

Pressure Anxiety is something we bring with us. A good consultant is motivated by pressure. The more chaotic or serious the situation, the calmer and clear thinking I become. Time constraints only focus my efforts to meeting them.

Sales Creating the next assignment has always been at least part of my work. I am always on the lookout for new or expanded mandates..

Please read my entire blog here.

Embracing Change

I am currently seeking my career home within the consulting environment. Sometimes, I am asked the question “Why do you want to change from your current business paradigm to the one of general consulting? Do you want to spend your days implementing Tririga and your evenings selling the follow on work? The question is one of concern and genuine surprise. “ If I politely turn the question around the response is bimodally either “I like development” or “It’s not my favorite, but, it’s part of the job.” Tackling complex problems where the roadmap to the best solution is unclear is fun.

I have asked myself what drives this type of question. It does not seem to be the work, or the consultant lifestyle. Anyone who knows me well knows I have done all of these work functions in my career. I just have not done them in this combination or in the consultant business model. I like application development. It has been a part of my professional work for twenty-five years. I will not go into the details here but I have developed applications while with every company I have worked for. It has never been central to my job description but has often been a justification for my compensation. The next question that comes up is about the travel. Travel is the price we pay to work with interesting people on complex projects in new environments. The fun of travel includes the opportunity to deal with new people in unfamiliar circumstances and the chance to learn new skills. Do I enjoy constant travel? My answer is same as that of most consultants I have encountered. The answer is sometimes yes, sometimes no. I am willing to pay that price, which is all any consultant can say. Travel is what brings us to customers with interesting problems, and that's where the fun is. Then there is the constant sales. Laying out the justification for and selling the next phase of work has always been a part of my business interactions.

Speaking with other consultants reveals another reason for their surprise. That is the one of change. Most job changes involve a controlled number of elements. One can change companies while keeping colleagues, work and clients roughly the same. One can change functions while staying in the same company. I am deliberately inviting sharp change into my professional life rather than the smaller steps most job changes entail. It is a bit like getting married, moving and starting a new job in the same year. Yet change is the only constant in our lives. We openly celebrate change in our business lives, after all, that is the service we offer. Yet, people often avoid big changes for themselves. Sometimes we are derided for bring unsettling change to our clients. People do not like to move beyond their own comfort zones. I have evaluated the costs and benefits of this change and have decided this is the path I am taking. Maybe my comfort zone is a bit wider than average. It is hard to tell this entire story in one blog entry so I have not begun to write this until now. In my next installment, I will outline the drivers that have taken me down this path.. Please read my entire blog here.

Transitioning To Consulting

I have been blessed with the opportunity to take a hiatus from the corporate world. My challenge has been to direct my efforts to that of a full time, stay at home dad. This period of my life has been one of my most rewarding experiences. With few exceptions such as myself, only a mother can truly understand what a difficult, yet rewarding job this is. The how I got there has to do with the events of September 11, 2001 which I will not go into here.

We decided that I would invest my time in our family while my wife continued working full time. While this has been a rewarding experience for our family, life goes on. It is now time for our daughter to transition to having a nanny for the times we are not able to be there for her. She will move into a new chapter in her life as I embark on the next leg of my career.

As I discussed in a previous post, I am seeking my career home in consulting. Although I have been a trusted advisor consultant for fifteen years, none of that experience has been with a traditional management consulting firm. I am taking this opportunity to move into an industry that uniquely matches my approach to work and my lifestyle. I have elaborated on the thought process to arrive at this decision in several previous posts. Consulting will take me far from home, with long hours. It is a lifestyle far different from the one I enjoy now, but very similar to the one I left from my prior career with Goldman Sachs, Morgan Stanley and First Boston. I am looking forward to helping new clients solve their most complex, vexing problems

As general consulting firms are a new space for me, I have expanded my self marketing efforts beyond the usual job board postings and calling one’s friends and colleagues. They would be fine for a lateral transition, but I have found them wanting for the new course I am taking. These include utilizing networks such as Facebook, Ecademy and especially Linkedin, where I am one of the one hundred most connected members. As I carefully think through problems before identifying a course of action, I found Six Sigma Black Belt training to be a natural credential to acquire. I have also found this blog helpful. Recruiters and contacts who have offered to help me have found this useful in getting a sense about me and why I am focused on this path.

The challenges of transitioning my career path to a new course are considerable, but, there are current and future benefits to it as well. I have made many new contacts, and more than a few friends who will be invaluable in my future endeavors.

If you like what I have written and would like to reach out to me, my contact information is on the right side of this page. I welcome your input.

The High Cost of Real Estate Mistakes

Real Estate missteps can be very costly. Many never come to light. Here is one way:

A major department store had an option to renew a downtown store lease. The option was granted when the store first occupied the space in a difficult market. The landlord agreed to the option provision to entice the tenant to take space in their building rather than one down the street. The landlord landed a paying, credit worthy, tenant. It provided for a renewal rent in line with the rate prevailing at the time the tenant moved in. In the meantime rents in the CBD of that city climbed substantially. The head office did not exercise the option before the date required.

The tenant put itself in the position of having to negotiate a new lease. There were no alternate spaces available nearby. The retailer had to decide to pay up or close the store. They agreed to a rent that was $25 million more than exercising the option would have been. The option was not carried on the books of the firm as an obligation or an asset. It did not appear on any management dashboard. The Real Estate department never told management there was an option. It never appeared in the 10k as a footnote. Management did not allocate resources to fix the problem. Nobody lost their job. No Six Sigma team was deployed to reduce Real Estate errors. This costly lesson never resulted in any improvement to processes.

The only ones who knew what happened were the head of the Real Estate department and a few of the Landlord's friends..

Please read my entire blog here.

The next step in data integration can revolutionize Corporate Real Estate (CRE)

Business enterprise software applications are becoming more integrated. Offerings such as Oracle with its Fusion strategy and SAP with its Netweaver integration platform are bringing disparate business data together. Managers are increasingly able to base decisions on information contained in applications far from their area of responsibility. The business cases for implementing these initiatives include coordinating decisions by ERP (Enterprise Resource Planning), CRM (Customer Relationship Management formerly the sales department) and HR (Human Resources formerly the Personnel Department).

This data, integrated to give core business processes information to make better decisions, can be applied to Corporate Real Estate (CRE). For example, a company needs to move an office location. It is now possible for the decision makers to know the zip code, salary band, telecommute and travel propensity and hours worked statistics for every employee. This information might suggest a most convenient location that is far different from the one upper management might choose for them. Early CRE applications were developed to provide solutions to manage specific aspects of real estate such as construction, scheduling, capital deployment and transaction analysis. As these applications are still maturing, there is no industry agreement on nomenclature. Application category names include Real Estate Portfolio Management (REPM), Facilities Management (FM), Construction Project Management (CPM) and Computerized Maintenance Management Systems (CMMS). There is a trend to classify these and other CRE applications into two broad categories called Integrated Workplace Management Systems (IWMS) and Enterprise Asset Management Systems (EAMS). These categories arise from the application category these systems evolved from.

The CRE application market is primarily served by niche players. As they evolve, they are certain to become more tightly integrated with, then a part of Enterprise Resource Planning (ERP) applications within such systems as Fusion and E-Business Suite from Oracle and mySAP Business Suite from SAP.


Please read my entire blog here.

In the right margin are links to some software providers that provide Real Estate applications.

Six Sigma and Corporate Real Estate (CRE)

Real Estate is usually a corporation's second largest expense after salary, yet one of the least efficient applications of resources. In recent years, IT application suites covering Human Resources (HR), Customer Resource (Relationship) Management (CRM), Supply Chain Management (SCM, Enterprise Resource Planning (ERP), Sales Force Automation (SFA), and other systems have enlightened businesses on the benefits of improving processes and, with the greater access to information, has led them to realign many of their operations. Integrated information systems have allowed managers from all levels of an organization an unprecedented range of data from functions throughout the firm. For example, the entire HR database in legacy systems was confidential and inaccessible to decision makers in other functions. With proper safeguards, data on where employees commute from, their travel propensities, their cost per hour of movement downtime, their adjacency needs, opportunity for telecommuting can all be analyzed. This data can be used to develop more optimal Real Estate deployments and used as inputs in the decision making function.

Real Estate has not been a major target for improvement in most organizations until recently. The customers are mostly internal and diffuse throughout the organization. The customer "owner" is often an influential entity within the organization and was more motivated to have their own requirements met than larger organizational objectives as there was nothing in it for them to see those functions improve. Metrics were rarely quantified and relevant data difficult to obtain from disparate systems. At the same time, normal customer requirements for Real Estate have become far more complex in recent years. Requirements for security, physical, human and infrastructure disaster tolerance have increased for all businesses and become the focus for firms who, until recently, did not realize its importance.

The challenge often begins with creating a consensus that Real Estate is a collection of processes with inputs and customers just like those serving external customers. Only by viewing internal users as customers can the process of improving/redesign begin.

Six Sigma is a framework, a method, a philosophy, a set of tools, a way of viewing processes used to create or improve business processes. There are many definitions as it was created by many practitioners with different organizations. Motorola, an early pioneer states on their website “Invented by Motorola, Inc. in 1986 as a metric for measuring defects and improving quality. Since then, it has evolved to a robust business improvement methodology that focuses an organization on customer requirements, process alignment, analytical rigor and timely execution.” GE defines it as “a highly disciplined process that helps GE focus on developing and delivering dependable client-driven services.”

Six Sigma has evolved into a powerful toolset to improve processes through out service organizations as well as its initial applications in manufacturing. As companies realize savings and improve output to external customers, some are starting to apply these tools to internal processes such as Corporate Real Estate. In the last couple of years companies including The Walt Disney Company, Citigroup, and Albertsons have applied Six Sigma initiatives to their corporate Real Estate processes..

Please read my entire blog here.

Why do I want to cut costs in Corporate Real Estate?

Cutting costs isn't an attractive way to improve quality. Eliminating staff and using lower quality inputs (think crummy buildings and single ply toilet paper) only reduces customer satisfaction. Who wants that for Corporate Real Estate? Most managers want better facilities and a higher level of service, not less. CRE managers are constantly looking for a way to make users (managers, departments and all employees) happier. CRE is usually less sensitive to cost than processes where an external customer pays money. Those processes are, understandably, designed to make money. It is easy to see the profit margin and the need to improve where there is a paying customer. CRE is often viewed as overhead, serving everyone in the organization, with fewer objective metrics of efficiency. Efficacy, is another matter. CRE managers are often given the mandate to provide a comfortable work environment and to do what it takes (within reason) to make users happy. A tool such as Six Sigma, billed as a cost cutting program does not command a warm reception.

Six Sigma isn't about cutting costs. Six Sigma is about reducing defects and variability. It does this by focusing on the customer. The cost cutting misconception is perpetuated when Six Sigma is sold to business managers as a way to cut expenses. In Six Sigma, the needs of the customer are systematically identified and quantified. They are then delivered with as few defects, as consistently as is economically feasible. The result is a better product with better service. Avoiding rework, unnecessary steps in the process and constantly having to deal with special situations is what saves money.

It is only when CRE managers understand that Six Sigma efforts result in improved service at a lower cost that a meaningful conversation can take place..

But my company is too small for Six Sigma

Six Sigma began in large organizations to improve quality of complex manufacturing processes. After a number of years of success in such firms as GE and Motorola, those firms began to apply DMAIC improvement efforts to service and support processes. Now non manufacturing firms small and large are employing Six Sigma methodology across their organizations. Because Six Sigma was developed by large companies with resources to devote to major research and improvement efforts, managers of non Six Sigma firms often view Six Sigma as tools that can only be applied by big companies. This is not true, but, is an understandable misconception. Six Sigma is highly scalable. Its methods are as useful for a single person designing their career search as they are for improving complex processes in large organizations. Six Sigma process improvement tools are valid no matter how many people are involved in a business process. Smaller firms have a number of advantages in their Six Sigma deployments. Management is closer to its key processes so involvement and visible support of senior leaders is easier to develop and maintain. Smaller firms do have fewer resources, money and time of its employees, than do larger firms. But, I feel this disadvantage is overblown. For example, large firms often devote a great deal of time an money to train many people in Six Sigma methodology. This is often to make sure there are no knowledge gaps in the process areas to be improved and ensure buy in by process owners in adjacent processes. This is unnecessary in the smaller organization where communication and cooperation across functional units is easier. Any business can be viewed as a collection of processes. Six Sigma tools can be employed regardless of the number of steps to accomplish the output or number of people involved..

Quality is a cyclical strategy

Product quality (or lack thereof) is often more a business strategy than a manufacturing failure. It may not be a conscious strategy but the cumulative effect of un recognized behavioral reinforcing loops within a company's processes.

Like most of human activity, quality levels run in cycles. These cycles have turning points or end limits defined by a crisis situation. (Management by crisis resolution) Often it goes something like this:
Quality is decreased improving margins and/or price competitiveness. This winning strategy persists until customers will no longer buy your product again because they do not want to see another premature failure. Examples include Sunbeam, US Steel, GM and Mercedes Benz.

Then, to increase market share or even save the company, quality is increased. Sales improve as existing customers purchase again and new customers are attracted by the now higher reputation for quality. The company can now charge a premium greater than the increased cost of higher quality. The improvement continues until the price premium exceeds the level customers are willing to accept before switching to a lower priced, lower quality alternative. Examples include IBM personal computers and Mercedes Benz. See article below.

Beware the Product Death Cycle

Six Sigma

Six Sigma process improvement is a rigorous procedure through a series of steps summarized by the acronym DMAIC. The focus of Six Sigma is the Customer. The Customer is the receiver or user of the output of the process. Customers can be internal or external to the organization. Six Sigma defines and quantifies customer requirements, then suggests and implements changes to the process to improve the quality of the product or service.

Each step has its own framework and many tools that can be utilized by the improvement team. The specific tools used in each step depends on the data gathered so far and the judgment of the improvement team. As more is learned at each step about the process and the product, several iterations may be necessary at each DMAIC step before the team is ready to move forward. It may take many weeks of hard work to accomplish each step. It is beyond this blog page to fully describe the components of each step. A basic definition of the steps are:

Define - Define the problem and the scope of the process under study for improvement.

Measure - Measure the output of the process and establish benchmarks to understand if the process meets customer requirements and to provide a baseline to evaluate improvements. Customer requirements are also called Critical to Quality Characteristics (CTQs). Also, measure key parameters of inputs and key steps within the process to enable the team to understand the problem and identify areas for improvement.

Analyze - Figure out what the data is telling you about the process and where improvements should be made. Often the data tells the team problems with the process are not the ones suspected during the Measure step. This can often mean additional data is necessary before the analysis step can be completed.

Improve - Implement the changed sub processes decided upon by the improvement team. Then measure the the improved process to see if quality of the product has improved to the level desired and is in control. If it has not, make additional or alternate changes to the process and impliment and measure again.

Control - Make sure the process remains centered, in control and within tolerances. Hand the improved process over to the process owner. Establish procedures for maintaining the improved process and a system for measuring the output of the process to catch out of tolerance conditions.

Sometimes while on the DMAIC path somewhere between Define and Analyze the team comes to the conclusion that the process simply cannot be improved sufficiently to produce the desired output with the required level of defects or at a reasonable cost. At this point the team will examine replacing the process with a new one. The team will then use a slightly different process. Often this is called Design for Six Sigma (DFSS). As Six Sigma is an evolving process with different practioners coining their own terms, there are several acronyms to describe it. The first is DMADV Define, Measure, Analyze, Verify. Another is IDOV Identify, Define, Optimize, Verify..

Voice of the Customer (VOC)

Voice of the Customer (VOC) is a process to discover the needs of the customer for the product or service. With this information a set of metrics can be created to quantify these requirements. A difficulty is the customer may not be able to state their requirements and may not realize what they would really like to see.

To discover requirements a number of data sources can be used such as customer interviews, complaint reports, focus groups, competitors products and even examination of products from other industries.

Not all requirements are equal. For example, if an elevator you wish to take fails to arrive, you will be annoyed at having to take the stairs. But, you will be more upset if you get into it and it fails to take you to your desired floor and you must wait to be rescued.

One approach to evaluating requirements is the Kano model. It divides requirements into three levels. The first level of requirements are the must haves. Without these requirements being met the customer will not be satisfied with the product or service. The second level are satisfiers. These are things that are nice to have. The presence and quality of these attributes is what customers usually use to judge one provider from another. The third level are the delighters. These are the things that go beyond what the customer expects. They can be small but have a large impact on customer satisfaction.

What does all this have to do with Corporate Real Estate? After all, we know our employees need office space, according to their needs or status, plus space for everything else. All managers are confident they know what their customers want. If they weren't, they wouldn't know what to provide. Employing a systematic discovery of user needs often leads to suprises and insights not understood by the process owner. By listening to the VOC we usually discover our understanding of actual customer requirements and their priorities of those requirements is incomplete.

Corporate Real Estate customer needs change constantly. New employees arrive and must be accommodated, some people leave and the functions people perform mutate over time to adjust to changing business and organizational conditions. By establishing a VOC monitoring process, these changing requirements can be quantified and the financial impact of meeting them, or not meeting them, measured.

A VOC deployment can help uncover requirements that have not been properly addressed or even ones fulfilled by separate processes in other parts of the organization. For example, with the realization of the importance of security, survivablility and redundancy since the tragedy of 9/11/01, many firms created contingency planning without completely integrating it within the real estate process. Sarbanes Oxley impacts real estate needs in many ways..

Quality Function Deployment

Quality Function Deployment (QFD) is a procedure with a long history that has been incorporated into the Six Sigma toolbelt. QFD is a tool used in the Define phase of Six Sigma to understand (quantify) the Voice of the Customer (VOC). Its purpose is to discover what the customer requires in the product or service and how best to balance those needs against product options.

According to the Kano model, there are three levels of customer requirements. The most basic Critical To Quality Characteristics (CTQCs) are the Dissatisfies. If these are not met, the customer will be unhappy with the product. Customers expect these requirements to be met. The second level of CTQCs are the Satisfiers. Customers do not expect all of these to be present but the more there are, the more pleased they will be with the product. Providing these CTQCs is where most products differentiate themselves in the marketplace. The third level is the Delighters. These characteristics are not asked for by the customer but add to the experience and set products above their competition. Identification of Delighters are the most difficult because the customer usually will not think to tell you about them..

There are a number of tools that can be employed when performing a QFD. The most common is called the House of Quality because when presented on paper it resembles a house with rooms. Other tools used in a QFD investigation are the Critical to Quality Process Operation Form and the Matrix of Matrices.