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Mercury News’ columnist got it wrong. Headline should be: HP Grows Up ( … with corporate real estate playing role) June 2, 2010

Posted by Bob Cook in Company Case Studies, Financial Planning & Analysis, Profession of Corporate Real Estate, Silicon Valley.
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Today, Columnist Chris O’Brien lambasts HP for finding success – not from innovating like Apple or Google – but from implementing a “ruthless, brutally effective strategy” that he playfully characterizes as “Buy a company. Cut costs. Trim employees. Repeat.” His column was prompted by HP’s latest layoff announcement.

HP should, however, in fact, be lauded for maturing into a well-run enterprise that can successfully compete in a complex world where success – especially for a large company – requires more than just coming up with the latest and greatest. It requires business acumen, discipline, and management – something that has been missing from the many great product-focused, geekdom companies that are now R.I.P. in the Silicon Valley graveyard. Think (and weep, ’cause it was great in many ways): Sun Microsystems.

HP is showing an alternative way for a tech company to succeed – and to do it long term. It’s a way to build an enduring enterprise – a way away from the self-limiting strategy pursued by most tech companies and which I’ll playfully characterize as: “Design breakthrough product. Develop cult following. Sell before competitor catches up. Repeat first three steps as many times a possible, then (inevitably)…. Blink. Hiccup. Crash.”

HP has become a corporate juggenaut by realizing, under the five-year leadership of CEO Mark Hurd, that success requires the careful management of resources: capital, people, assets, infrastructure. The last of these is partially the domain the HP real estate group which is clearly busy with initiatives like the consolidation of HP’s data centers and which is proving its worth to the enterprise.

According to HP’s latest 10-K, of 77 million square feet of space, fully 10 million square feet had been vacated – probably significantly helping on-going P&L, albeit with some large one-time negative hits for write-offs and reserves. While only three million square feet had been sublet such that this vacated space continues to drain cash, once those unneeded leases burn off, the cash flow savings will become as permanent as are the P&L savings already in place. Having said that, subletting three million square feet is no small feat. (Pun intended.) Moreover, let me tell you, vacating 10 million square feet is an even bigger feat. (Yep, pun intended, again.) You might think, “what’s so hard about moving out of real estate”, but it must have involved thousands of decisions, hundreds of presentations, and dozens of approvals to decide which sites to vacate, when to do it, how to do it, who should should pay for it and who should profit from it.

As companies like HP become mature enterprises – managed by professional managers who leave product design and marketing to others and see their job as managing the enterprise – corporate real estate departments become more important. To manage an enterprise is to manage the company’s infrastructure – both hard (e.g. real estate, IT systems) and soft (e.g. culture) – and corporate real estate plays a central role in this area. Products come and go. People come and go. Infrastructure endures.

Cisco’s water conservation March 23, 2010

Posted by Bob Cook in Company Case Studies, Green Initiatives, Silicon Valley.
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There’s some good press coverage on Cisco’s water conservation efforts. It’s part of Forbes coverage of World Water Day (March 22nd) for which Forbes proclaims that the “next oil” is “water”.

For some reason, the article highlights Cisco’s waterless urinals when I think the really interesting story, and the one with wider ranging implications, would have been how they’ve linked their sprinkler system to web-based weather forecasting systems to manage their landscape watering.

Is San Jose Really a Supply-Constrained Market? March 9, 2010

Posted by Bob Cook in Real Estate Markets, Silicon Valley.
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ING/Clarion has released some thoughtful work that suggests that San Jose and San Francisco are among the most supply constrained metropolitan office markets in the country.  The work uses the relationship between increases in rental rate and supply increases as a measure of price elasticity, which ING/Clarion thinks is a good proxy for how constrained supply is.  

It’s no surprise that San Francisco is high on the list of constrained metros with it’s challenging  geography and its regulatory constraint on downtown growth — the so-called “beauty contest” that allows only so much office space to be built each year.

San Jose, though, is not quite so clear.  There have been and continue to be plenty of good sites to develop along the 237 corridor, in the Moffett Field area, along the 101, and in downtown San Jose — not to mention many sites with one story office structures that are prime for redevelopment.   In fact, there have even been some developer-requested downzonings in recent years — commercial to residential.  All this had me thinking that office supply is not particuarly constrained in the San Jose metro – which most people, of course, call “Silicon Valley”.

Nevertheless, one of the benefits of a statistical study is that it can challenge our thinking which tends to be based on anecdotes.    And so I’m going to be doing some rethinking.  And I’m wondering what others are thinking.

Here’s the article:

Why Supply-Constrained Markets Hold So Many Advantages.

Please comment.

Earthquakes and Enterprise Survival February 2, 2010

Posted by Bob Cook in Business Continuity Planning, Financial Planning & Analysis, Silicon Valley.
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A number of blogs have posted a news report that an earthquake was “overdue” in Port-au-Prince – and oh, by the way, a quake should be expected in many American cities not typically associated with earthquakes: St. Louis, Seattle, Charleston, Memphis, Salt Lake City, and Boston. A FEMA report from 2001 cites additional high earthquake-risk cities (beyond the well-known ones in California): Albuquerque, Anchorage, Atlanta, Honolulu, Las Vegas, New York/Newark, Philadelphia, Portland, Provo, Reno, and Tacoma.

New York, an earthquake risk? Who new?

It makes me wonder how much business continuity planning has been done by companies dependent on at-risk locations. And more generally, to what extent vulnerability to earthquakes plays a part in company stock valuations. If it is very little, as I imagine is the case, it seems like there is a lot of room for arbitrage by the Black Swan artists. Going short on stocks of companies vulnerable to earthquakes would likely eventually pay off. Better yet, there seems to be scope for some negotiable instruments to be invented that allow investors to invest on both sides of whether an earthquake hits or not.

While facilitating such bets might seem immoral to some, in fact, such an instruments would allow a company faced with earthquake risk to hedge against this risk by buying a position that profits if an earthquake hits. Then, in the event of an earthquake, they would be able to offset their business-continuity costs (or is it incontinuity costs?) with the profit gained from the instrument.

Over the last decade, companies have become more aware of the risks posed by natural calamities, and as a result business continuity planning has arisen as a discipline. From my observations, though, those doing business-continuity planning have only been able to chip away at the edges of catastrophic risks. They’re able to do things like make sure they have redundancy in their own facilities, have multiple supply chains, and enable employees to work from home. These things are valuable, but don’t deal with the real problem of a major catastrophe in a large city which is that the surrounding area – physical and social – becomes broken, non-supportive, dysfunctional. Government services aren’t available; transportation and communication systems are broken; civil disturbances erupt; people focus on survival and stop working; residents eventually leave town.

For a company located in a hazardous zone – whether it be from earthquakes, hurricanes, flooding, etc – no amount of advanced corporate planning can overcome these challenges (except perhaps planning focused on relocation to a more benign environment). A company in the midst of a major catastrophe is stuck with negative consequences. They’re unavoidable. Business anywhere-near-as-usual, in fact, cannot continue. So, business-continuity planners have got to start thinking in different terms. Their ultimate goal needs to be, not business continuity, but rather “enterprise survival”. They need to ask questions like “how much revenue will be lost if there’s a quake and how can we make it up?” They need to think outside the box of their own organization and facilities and those of their suppliers. They need to find a way to mitigate the damages they will suffer because of what goes on outside these boxes. They need to go beyond IT engineering and civil engineering and focus on risk management and financial engineering. They need to look at concepts like markets in catastrophe-based negotiable instruments and large-scale insurance cooperatives.

This admittedly draconian view of natural catastrophes will not sit well with some, but only those who have been able to ignore the harsh reality of what has been on our TV screens: New Orleans, Chengdu, Port-au-Prince. Sure, the likelihood that your company will be hit by a calamity is low, but the consequences could be severe.

Starting again… May 27, 2009

Posted by Bob Cook in Financial Planning & Analysis.
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I began a corporate real estate blog when I was with Sun Microsystems a few years ago. This was back in the dark ages of blogging. At the time, Sun Microsystems was one of the few companies that encouraged employees to blog, and I took advantage of the blogging infrastructure that the company provided. When I left Sun, though, back in 2006, I stopped blogging.

It’s time, however, to start-up again. Like many bloggers, writing helps me organize my thoughts and come to new insights. And if I’m writing anyway, why not share my thoughts?

So here it is. Starting again….

BTW, if you’re interested in my old blog, you can find it here:   http://blogs.sun.com/bobcook/