The Next Challenge for Japanese-Style Management is Global Management of Real Estate

Many Japanese global companies are suffering from the burden of paying rent for their overseas offices. Takahiro Takahashi, head of the JLL Japan Integrated Portfolio Services Department, which offers support for Japanese companies expanding into overseas markets, says that the root cause is “ineffective governance of overseas offices.”

May 02, 2018

Japanese companies’ governance over overseas bases is too slow

The idea that corporate headquarters should manage domestic and overseas real estate costs together as a whole is called “global CRE management.” European and North American companies have been practicing it for over 20 years. The overseas expansion of Japanese companies began in earnest over 10 years ago. Some major companies have as many as a thousand subsidiaries. However, compared to European and North American companies, governance in Japanese companies is extremely sluggish.

“Generally, overseas offices of Japanese companies are local companies established according to local laws. They manage their finances, accounting, labor, and legal affairs on their own. They’re very independent. As for real estate, if you own it it’s an asset, and if you rent it it’s an expense. Either way, you have to report it on your balance sheet and profit and loss statement. That’s why real estate falls under the jurisdiction of the on-site company, and corporate headquarters has no say over it. It’s an issue in Japanese-style management,” says Takahashi.

Strong authority over overseas subsidiaries

Management of overseas offices at European and North American companies is centralized because real estate is regarded as an essential infrastructure for running a business. When you have a thousand offices overseas, the total cost of rent is just too big. Real estate costs are considered fixed costs second only to labor costs, and managing them across the whole company can lead directly to better profit margins. In Europe and North America, there are teams that specialize in managing real estate, and they are said to have strong authority.

However, Japanese companies’ overseas subsidiaries are separate companies, so it’s not as easy for corporate headquarters to get their voice heard. It can also be difficult for corporate headquarters to get a grasp of what’s going on at overseas locations. For example, if an overseas subsidiary wants to sign a lease agreement for an office, then headquarters has to decide whether to approve it, but they don’t have the resources to judge whether the rent is reasonable. Getting approval from headquarters takes time, and if they don’t sign the contract, that will have adverse effects on their business activities, so headquarters is left with no choice but to approve.

Some Japanese companies launch reforms

Rethinking real estate costs is one of few ways that a business can improve its profit margins. Despite this, Takahashi says, “Since about 2010, Japanese companies have also been starting to recognize the importance of CRE management, but currently, only a small amount of companies have implemented real reforms.” At those few companies, the general affairs departments, which manage the real estate, take the initiative on reducing real estate costs in order to contribute to the running of the business, and that’s starting to produce results. “In one company, the efforts of the general affairs department got them shortlisted for the CEO’s award,” says Takahashi. Some companies are starting to sound the alarms and actually change their behavior. For those companies, the JLL Japan Integrated Portfolio Services Department provides solutions for the optimization of overseas offices, and responses form clients have been good.

One advantage of outsourcing is supplementing your manpower, but, Takahashi points out, “Job descriptions are a big problem in outsourcing.”  In European and North American companies, job descriptions are specific and set in stone. Work outside of a person’s job description is not their duty. The problem Takahashi speaks of is that staff at overseas offices can’t be expected to take on duties outside of their job descriptions, which may include scrutinizing lease agreements, researching market rent, and other work that doesn’t need to be done on a regular basis.

Why to hire outside professionals

For Japanese companies that have a large number of overseas offices, hiring outside professionals well-versed in matters of real estate can be a shortcut to implementing global CRE management. When it comes to real estate, the biggest cost is rent. Reducing rent unit prices is a concrete way to cut costs, but, according to Takahashi, “What’s important is whether or not you can negotiate with the owner in a way that makes sense with the current office market in that area.” JLL, which carries out global business development at over 300 offices in 80 countries, can cover the markets in major cities all over the world.  It’s also worth considering not just reducing rent unit prices, but also adjusting the floor area of offices and cutting the overall cost of rent. Thankfully, JLL also has a workplace consulting team that is ready to work for you on a global scale. "Reconstructing a workplace to make it more comfortable and easier to work in, and cutting the amount of floor space you’re renting at the same, is also a possibility," says Takahashi. We will not only suggest concrete ways to reduce rent, but also serve as a bridge between overseas subsidiaries and your corporate headquarters and coordinate internal issues. Many clients do not have a grasp of the current situation. As a first step, we make databases that make real estate costs visible. Real estate contracts throughout the world vary in many ways, including language, units of measure, and business customs. Collecting them in a unified database with consistent metrics requires expert skills. JLL can help you in any situation, no matter how irregular—we’ve even had cases in which local subsidiaries did not know where their lease agreements were stored.

Strengthening governance over overseas offices is the first step in CRE management. Reexamining the office environment could not only reduce costs, but also achieve improvements in labor productivity.