Lisa Huntsman knows that the key to success in today’s economic climate isn’t just finding ways to do more with less but, in many cases, just doing more with the same.
“Those that can respond quicker with good information are the ones more than likely that will get awarded the business,” says Huntsman, the president of the New Philadelphia, Ohio-based manufacturer Lauren Manufacturing.
Huntsman has been focused on this task since the recession first impacted the manufacturing industry and Lauren’s 250 employees back in 2008.
“There is a whole crunch of everything has to be the same quality but just continue to push it on the lead-time standpoint,” says Huntsman. “I think we’re doing a good job of delivering on that.”
To keep up with increasingly shorter lead times, get the highest return for shareholders and meet the needs of new and potential customers, the company had to reevaluate its systems and staffing to make efficiency the top priority.
“If we just keep doing what we do then we’ll always get what we get,” Huntsman says.
“There’s a lot of revenue invested from the company’s standpoint to get new projects launched, and we’re really working closer with our sales teams and with our customers to make it quicker when possible and make sure we’re not dropping the ball anymore.”
The first step was looking for inefficiencies in staffing, including duplicate personnel or areas of waste in the administrative process.
“It’s not just saying, ‘OK, it’s just getting too busy over here,” Huntsman says. “It’s do we look at the job content? Are there some things our folks are doing that seem unnecessary?”
The organization has also been more conscious about adding new people, ensuring it builds its team with talented people, who have targeted roles and are capable of making informed decisions to drive results.
“We all make mistakes, but there are some people who are very conservative and are never willing to put themselves out there,” she says. “We’re looking for the people that are willing to take a very educated set of information and say, ‘Let’s go with this.’”
Empowering employees to make decisions enables a faster speed to market for products and services by elimination bottlenecks in decision-making that slow progress.
“We believe in driving the decision-making process to the front line as much as possible from customer service and engineering, giving them the tools so they can make those decisions and feel empowered to do that,” Huntsman says.
Part of that empowerment is also the result of coaching. Huntsman says she takes time to talk to employees regularly on an informal basis or after the big meetings in order to learn their challenges and figure out how the company can facilitate and empower their decision-making.
“I think knowing that they have our support that it’s OK,” she says.
Huntsman says the other key to increasing operational efficiency is setting clear priorities so that people don’t get distracted from the most important goals, for example, speed of service. By making sure that your company continues to partner with the right customers, work on the right projects and keep people focused in the right areas, you can continue to deliver at a competitive level.
“No. 1 is making sure that we don’t get distracted trying to be everything to everyone, and then nothing gets accomplished,” Huntsman says.
By being able to do more with its people, operations and systems, the company was able to achieve 12 percent sales growth in 2010.
“We have made positive strides,” Huntsman says. “Our business has continued to increase in sales, and I think everybody, not just Lauren, has to work harder with less people than we did prior to the recession. I don’t see that changing.”
How to reach: Lauren Manufacturing, (330) 339-3373 or www.lauren.com
Divide and conquer
One of the reasons Lauren Manufacturing has accomplished growth despite operating in a challenging industry is by continuing to be diversified in the business sectors that it serves.
“We have a couple targets that we’re always going after,” says President Lisa Huntsman. “It’s just trying to keep a balanced portfolio of customers in the industries that we’re in that has been the key to our success. That’s how it started and that’s how we continue to move forward.”
This diversity gives the company the advantage of increasing penetration in a range of industries, including transportation, solar and lighting. While many of these sectors haven’t grown on their own, the company has taken more of the market share from its competitors by targeting business opportunities and focusing its efforts where they are most needed.
“I always go back to say making sure that we don’t put all of our eggs in one basket keeps the company healthy,” Huntsman says. “We really try to make sure that no one customer has more than 10 percent of our business to make sure that we’re serving multiple sectors.”
Again, this is only achieved by having team of people who can effectively make good decisions based on their knowledge of customers and the business.
“In our business, from the time you quote to the time when you can turn it into production can be six to 12 months,” Huntsman says. “So you’ve got to make sure you’re making the right decisions upfront, because that’s going to have an impact down the road.”
Office buildings cost a lot of money to operate and maintain. The operating and tax expenses (OPEX) for mid-rise to institutional-quality high-rise office buildings in Los Angeles range between $11 to $16 per square foot per annum, or $5.5 to $8 million for a 500,000-square-foot building. OPEX is comprised of management fees, administration and overhead, utilities, janitorial, mechanical system maintenance and fees, window washing, parking maintenance and fees and landscaping along with myriad other taxes, fees and miscellaneous expenses.
“The OPEX section in a lease is typically very long and almost impossible to get through in one read without falling asleep. It is the quintessential boring-but-important topic,” says Robert Chavez, founder and CEO of Guardian Commercial Realty. “A primary responsibility for landlord brokers and property managers is to make certain that all of these operating costs are passed on to the tenants that occupy their buildings.”
Smart Business learned more from Chavez about how tenants can keep operating expenses from getting out of control.
What should tenants look out for concerning their operating and tax expenses?
Landlords employ a very strategic methodology when processing their OPEX. Most commercial office landlords use what is known in the industry as a ‘full service gross’ lease. Gross leases incorporate the rent and operating expenses into one rental rate number. They are either quoted annually or monthly as follows: $36 per rentable square foot per full service gross per annum, or $3 per rentable square foot per full service gross per month, depending upon the marketplace.
The OPEX for the first year of a gross lease is referred to as the ‘Base Year.’ The Base Year becomes the cost basis for OPEX over the lease term. Any cost increases to OPEX over and above the Base Year are passed on to the tenant as a portion of their pro rata share. One would presume that any decreases in OPEX would automatically be deducted from any accrued escalations, but that is not always the case.
How can this type of lease hurt the tenant?
Initially, OPEX may seem like a minor issue because the first year expenses in a gross lease are zero — it’s the Base Year. The second year ‘pass-throughs’ may have some modest increases that show up as additional rent on the monthly rent invoice. They are typically so small that tenants do not pay much attention to them. It’s the same for the second or perhaps even the third year. In or about the fourth year, the magic of compounding begins to take effect and that line item often grows to an alarmingly large number. What started at zero, and then a few hundred dollars per month, often grows to thousands of dollars per month in additional rent.
For example, if a base year OPEX is $15 per square foot, and expenses increase at 3.5 percent per annum, the OPEX will grow to $18.40 by the seventh year of the lease term. That $3.40-per-square-foot increase equates to $1.7 million in additional OPEX costs for a 500,000-square-foot building. Accordingly, a 25,000-square-foot tenant would pay $85,000 in annual OPEX costs given their 5 percent pro rata share of the building. This scenario can be even worse if the building is reassessed due to a change in ownership and increased taxes are passed on to the tenant. These are costs that were not likely budgeted for by the tenant. The OPEX costs were creatively camouflaged years ago when the lease was executed.
Tenants must be mindful that these pass-through expenses will likely continue to grow for the duration of the lease term and there may be very little, if anything, a tenant can do about it after the lease is signed.
How can a tenant avoid excessive escalations?
There are measures tenants can take to mitigate the fiscal impact of OPEX escalations. Action must be taken as part of specific and detailed negotiations before a lease is executed.
The primary areas of focus are i) exclusions from OPEX, ii) expense caps, iii) category protection, iv) audit rights and v) properly quantifying the tenant’s pro rata share. Moreover, the tenant must remain diligent every year to make certain all of their hard-fought exclusions and protections are being followed by the landlord when the OPEX is restated each year. It is often the case that a general OPEX statement is presented to all tenants in a building, and it is up to the tenant to recognize that their exclusions may not have been properly accounted for. Issues like this seem to be more pervasive during recessionary periods when landlords are looking for creative ways to bolster revenue.
Can tenants handle these issues on their own?
Tenants can expect landlords to negotiate very aggressively against the tenant safeguards listed above. Common landlord responses are that it is an accounting nightmare for the landlord to track a different set of exclusions for each tenant, or that the tenant is too small to merit such protection. Some landlords will go so far as to say that they ‘just don’t do it that way.’
As is the case with any important negotiation, understanding concepts is only the beginning of the process. Taking this understanding to a successful conclusion takes time, experience and expertise. Landlords are experts at their craft and practice it every day. Tenants typically sign a lease once every five to 10 years, and even the most sophisticated executive can be outmatched by an expert landlord. There are at least 50-plus exclusions and related protections that commercial real estate experts negotiating on behalf of tenants demand. Truly understanding which are the most important for you, and where to spend your time and focus, is a real challenge for novices.
When it comes to commercial office operating and tax expenses, one bad real estate decision can haunt a company for many years to come. Tenants that do not use a tenant-oriented broker and real estate lawyer often regret it after the lease is signed and the OPEX escalations begin to grow.
Robert Chavez is the founder and CEO of Guardian Commercial Realty. Reach him at Robert.Chavez@guardianusa.net or (310) 882-2060.