|
Rob Barber EDR’s CEO brings his unique perspective to address topics of strategic interest, including the state of the ESA industry, business management issues, trends in information technology and global developments affecting environmental due diligence practices.
|
Recent Blog Entries
About 2 weeks ago I finished reading the first fictional noval I've read in about 6 months. The book is Deliver Us From Evil by David Baldacci and, in brief, it was pretty much like every other Baldacci book I'd ever read. The guy seems to have a repeatable formula for story telling that works so, as they say, "if it ain't broke, don't fix it."
So, since I'd finished the book, I was in the middle of pondering what to read next when someone (thanks RGD) recommended Behind the Cloud by Marc Benioff. It's the story of Salesforce.com and the birth of the cloud computing movement. I'm about a third of the way into it and so far have found it to be a pretty quick read.
Then, out of the blue, two co-workers decided to visit Amazon and buy me a book. One person bought me The Why of Work by David Ulrich and someone else bought me Switch: How to Change Things When Change is Hard by Chip Heath. Everytime someone buys me a book I'm always torn wondering about their intentions. Are they trying to stealthly point out my personal areas for improvement (e.g. "flaws") or are they simply trying to keep me entertained? Who knows. Regardless, I haven't started reading either yet but will as soon as I'm done with Benioff's book.
Also, yesterday I ordered The Art of War. I'd always wanted to read it but for some reason never did. Maybe that's what I'll read next.
Those of us in the real estate industry, both information and services, should be keeping an eye on how Google's move into travel plays out.
It was only a matter of time before Google gradually began the inevitable process of "going vertical". Travel seems to be the logical starting point because it's the "largest e-commerce market". I'm not sure that's true but even so, if size matters then real estate can't be far behind.
When (not "if") the day comes, Google's real estate move will be around residential listings and will go way beyond their previous Google Base initiatives. They will target the encumbants (MLS', listing portals) and work to produce property listing search results that are more targeted, relevant and useful for consumers. They will transition from search provider to service provider. Then at some point they will move into the commercial real estate world.
Back to travel. It's kind of ironic, isn't it? Expedia, Travelocity, et al essentially killed the travel agent and now, only 10 years later, Barry Diller seems to be concerned that Expedia's days are numbered.
"If you're not movin' and changin', then you're dyin'"
The latest McKinsey Quarterly contained a brief article defining what the authors see as the "five crucibles of change that will restructure the world economy". A good read but no earth shattering insights with respect to any of the five crucibles (growth in developing economies, need to improve productivity, we're more connected, sustainability matters and a growing public sector).
But there was one innocuous statement early in the article that strikes a chord: "the biggest business challenge is responding to a world in which the frame and basis of competition are always changing".
The "frame and basis of competition".
I love this phrase because it captures a really, really complex issue as succinctly as possible. It presupposes that tectonic shifts are occuring below our very feet, that what we thought our view was is no longer and who we thought our competition was isn't really so. Or at least those former world views are now rendered, at best, incomplete.
I also liked how they chose to use the word "responding" instead of something more proactive like "driving". The subliminal message here is that, despite how we all like to think we're brilliant strategists, quite often the difference between life and death (in the business sense) is actually the ability to adjust, morph and adapt (vs. kill before being killed).
McKinsey has a habit sometimes of taking 100 words to say something that could have been said in 5. Not so in this case.
After following the back and forth discussion regarding "$700 Phase I", I can't help but think we're missing the big picture here.
Sure, low cost Phase Is are an issue. But isn't the bigger issue more about whether our market is expanding or contracting? Everyone's focused on $700, $1,200 and $2,000 but, in my opinion, the primary numbers we should be focused on are 100,000, 150,000 or 200,000.
Let me pose a question. Do you think that in 10 years, the market for "ASTM Phase I ESAs" will be larger or smaller than it is today?
If you think the market will be larger then, by definition, you feel you're operating in an expansion market. Your tide is rising. As a result, you probably should focus on issues like the cost of service provided, sales, marketing, quality and how you can add value to avoid commoditization.
But if you feel the market will be significantly smaller in 10 years, say 100,000 transactions per year or less, then how important is the average ESA cost in the larger scheme of things?
Maybe it's time for us to identify a new "core metric"? Something to replace "average ESA cost" that has us all focused on bigger opportunties. Why don't we measure metrics like "annual recurring revenue per property"? What would it take to make this happen and what would the size of that market be?
In short, rather than focusing so much energy on how to extract more revenue from the market we've been serving for the past 20 years (and lamenting our collective inability to do so), maybe we should be focusing our energy on building a new market. A market that serves new customers, meets new needs and is expanding.
Last week I attended a conference of business information executives. The attendees came primarily from Europe and the US and included CEOs, heads of sales, product development and business development.
At the conference one of the speakers identified the following four "roadblocks to growth" which I thought I'd share:
- Stubbornness
- Isolated control freaks
- Blind loyalty
- Confusing hard work with progress
Item #4 struck a chord with me in part because of all the changes that have occured within EDR (and our markets) since the recession started. When the size of a market contracts significantly due to factors beyond your control, it really forces you to examine everything you do and question how necessary it is.
In most cases, I think hard work isn't the issue.
At our company and at many companies that I visit each year, the teams are filled with people who work very hard and put in a great effort. Many hours are spent at the office or on the road. Code is written. Customer calls are answered. New services are developed. But are they making progress? Is all this work producing the desired results or is it simply keeping people busy? Are my customers benefiting because of what I do or what my company is doing? Is all this hard work leading to growth?
Those ares the real questions and will ultimatley determine how much success can be achieved. The question shouldn't be "am I working hard" but "am I working hard at the right things and is my hard work producing growth?".
Fortunately, while "effort" is hard to measure, "progress" isn't if clear metrics are established, tracked and given high visibility. After all, what get's measured gets managed.
I think its human nature to sometimes get into a groove and keep running in a certain direction. For a while that might work perfectly well. But over time circumstances change due to external forces and your efforts gradually begin to produce diminishing returns. Yet when confronted with this many of us immediately try to "fix" to problem by working even harder. Working harder is often great medicine but not for this ailment.
Every so often its important to stop working hard for a moment and consider not the level of effort but the progress. If progress continues to be made then keep at it. But if progress has slowed or stopped it may be time to rethink what it will take to start growing again.
Who thinks the pace of change is slower today than it was yesterday?
Who thinks the pace of change will be slower tomorrow than it is today?
My guess is that nobody agrees with either of these statements. Instead, I'll bet everyone can agree that the pace of change is increasing and will only continue to increase. Yet despite this, we all witness some amazing behaviors everyday in defense of the status quo.
Some of these behaviors are very well documented and highly publicized. The "establishment's" response to digital media in the newspaper and music industries come immediately to mind. Yet I also see resistance to change happening elsewhere including within our industry.
Over the past 18 months we've watched our industry go through turmoil that has produced a significant contraction in property transaction volume. Some people and firms have responded quickly and aggressively to this changing landscape. Some businesses have been reorganized and refocused so that they can adapt to change more rapidly. Yet others resisted this until there was no alternative. It's been shocking at times to watch executives stand by and offer no new plans for growth as their businesses crumble around them.
We're now about 20 months into our CRE recession and are finally starting to see the market expand again. As this expansion has started, one thing had become amazingly clear to me. The companies who reorganized, repurposed and recreated themselves over the past two years into more de-layered,customer-centric, fluid, nimble and flexible organizations are benefiting first. The companies who were slow to adapt are still struggling more and will continue to for some time.
As we head into 2010 and beyond, I believe the qualities that customers, investors, and employers will value the most are responsiveness, flexibility and openness to reinvention. The skills and strategies that were most successful and valued yesterday will not necessarily be the same skills and strategies required for tomorrow's progress. This fact is what makes life both exciting and sometimes scary.
Peter Drucker used to talk about "abandonment" quite a bit. His point was that the most successful companies (and executives) possess the ability to completely abandon what "used to work" in favor or what is most likely to work tomorrow. There are no sacred cows, only growth, value creation and progress.
"Abandonment" certainly has negative connotations. For me, it immediately strikes an emotional chord and my mind goes to imagining someone being left alone unfairly. However, in a business setting, abandonment needs to be embraced more. Dropping yesterday's behaviors, if they no longer work, is not the same thing as abandoning a person. In fact, I think the opposite is true. Abandoning yesterday's approaches in favor of trying a better way actually helps people. It challenges them to learn new skills, experiment and innovate.
And in my opinion, that's exactly what will lead us to the next wave of growth across the economy.
EDR will soon be starting a phased roll-out of a national building permit database that will include a property specific building permit report. This new service was made possible by a recent investment EDR made in BuildFax (located in Asheville, NC and Austin, TX). At the moment, the BuildFax database includes:
· 14.4 million unique addresses
· 48 million building permits
· 3,300 cities, towns and villages across the U.S.
There are multiple reasons for EDR's investment in BuildFax, not the least of which is that Building Department Records are a Standard Historical Source cited in ASTM E-1527. Adding this information to our suite of historical research products means that EDR will now be able to provide 6 of the 8 Standard Historical Sources to environmental professionals who chose to outsource a portion of their historical research.
The service will work similar to how the Sanborn service has worked over the years. Environmental professionals can voluntarily elect to search the database for a particular address. If no permits are identified, EDR will deliver a "no permit" letter documenting that a search was conducted. When building permit records are found, EDR will deliver the permit history to the EP electronically.
Our long term intentions are to continue aggressively investing in BuildFax so that the database grows to include more properties, more permits and more geographies.
I hope that over the coming weeks and months environmental professionals will check out the BuildFax database and evaluate the usefullness of the building permit report. As with all of our products and services, we're eager to hear what you think so please, please, please let us know!
So I've had my house on the market for the past 18 months and there's been practically zero interest from anyone in buying it. I mean, very few people are even asking to come by and see it. Meanwhile, two other homes in my neighborhood of the same model and in the same price range have both been sold recently. So what gives?
Over this entire time, the same Realtor has had the listing so we recently had a sit-down to talk about "strategy". The two questions I posed to her were:
1. How did you sell during the boom years? and
2. How has your selling strategy changed since the recession?
Her response was to look at me as if I just asked what the square root of 9,201 was. Complete bewilderment.
After a long pause, she responded roughly as follows: "Well, I've put your house in the MLS, the listing now appears in multiple online listing sites (Realtor.com, Zillow, etc.), its been advertised in all the local papers and I've done three open houses." To which I then asked, "Didn't you do all those things before the market crashed?"
The point here is that she sells homes today exactly how she sold them in 2006. Same strategies, same tactics. Nothing has changed to reflect the fact that the entire market has changed.
This left me wondering if some in the CRE due diligence field aren't making the same mistake. As an information company, how is EDR changing its sales & marketing tactics given the market? What are environmental consultants doing different today? Are they trying to sell today the same way they did in 2006?
There's no short answer to these questions because everyone's doing something different. But one thing has been made perfectly clear to me these past 18 months. The firms that sell today the same way they did in 2006 are not getting their desired results. But the firms that have changed strategies and tactics, while not guaranteed success, are performing better as a group and have been less impacted by the market.
So are your tactics the same today as they were three years ago?
I find the Netflix story completely compelling and I'm not even a customer. After all, here's a business that, on the day it was started, knew it would die quickly if it didn't immediately begin to change.
In case you're not familiar, Netflix makes money by mailing DVDs to subscribers at their request. After the subscriber watches the DVD (movies, games, etc.) they mail it back and receive a new one. The company was founded on the premise that Blockbuster's business model was flawed; specifically related to their system of charging high fees for movies returned late. From the start, Netflix was a commercial success and the company has experienced strong growth.
But Netflix's founder and CEO, Reed Hastings, knew from the start that a business that mailed content, in this case DVDs, would have a relatively short lifespan. It would only be a matter of time until Netflix's customers would be able to experience the exact same content on demand, instantly and probably at a lower cost. In other words, Netflix's "real" competition isn't Blockbuster or another DVD mailing service, it would eventually be the satellite, telco, cable or ISP. More than likely it would be some combination thereof.
So even though the company generates over $1.3 billion in revenues, it is currently in the process of tearing itself down so that it can rebuild. Imagine how painful that must be for the average Netflix employee. There are no sacred cows here. Instead, Netflix has accepted the reality that the skills that produced the first $1.3 billion would not be the same skills that produce the next $1.3 billion.
What's unique about Neflix isn't their business situation, it's their acceptance of it. All business models eventually die and are replaced by more efficient business models. Sometimes this transition takes decades (steel, automobiles) while other times it seemingly happens overnight (fax machines, travel agencies).
After all, when is the last time you faxed your vacation plans to your travel agent?
For those of us whose livelihood is impacted by property transactions, there is one fundamental question that we should be thinking about: what happens to transactions volumes if interest rates rise rapidly (and possible reach double digits)?
You'd think that transaction volume would have to be negatively impacted, right? After all, if the cost of capital increases, the cost of ownership increases. And if the cost of ownership increases, fewer people (or businesses) can afford the property.
But recently I heard an economist (who specializes in real estate fundamentals and forecasting) disagree for the following reason. If we have more aggressive inflation, the price of everything increases; not just the cost of capital. Included in the definition of "everything" are most commercial products and services and wages. So if companies are able to pass along price increases to their customers, and if workers see earnings rise, then they're also able to afford the higher priced property or home. Basically, his point is that "it's all relative".
Rubbish! I don't see any way that rising interest rates can be anything other than a drag on transaction volumes. All one needs to do is look at 2002 through 2007 as a recent example. During this time, rates were low, financing was easy and transactions exploded in both the commercial and residential markets.
So if you're planning and budgeting, and if need to develop a theory for what business might look like in 5 to 10 years, ask yourself this question: what is the most likely long term trend for interest rates?
Given the U.S has unfunded Social Security and Medicare liabilities of over $100 trillion, I think the long term interest rate directions should be rather clear.
Happy Father's Day to all the dads out there and a huge "thanks" to all the moms, teachers and kids for being the ones who "really make it happen". Being a father of two (3 and 6) I was struck yesterday by all the thought that goes into preparing for this holiday and quietly remorseful that I haven't put equal effort into Mother's Day, various birthdays and at least one anniversary.
Clearly, teachers had been thinking about this for weeks and had concocted all sorts of art projects designed to make grown men weep (I love daddy because...). Then, during lunch or dinner, family after family walk into restaurants or arrive at homes to share a meal, laugh and just spend time together due to plans made and reservations booked by moms.
I don't mean to insult anyone but I think, in general, mom's do Father's Day better than dad's do Mother's Day.
For doing exactly what I said I would not do when I started this blog; let months pass by without making an entry. Why did I let this happen?!
The easy excuse is "I've been busy" but that's really not much of an excuse. Everyone is busy yet still find time to do things that are valuable. After all, over the past several months, while I haven't blogged at all, I've been reading other's people's blogs, learning what their opinions are, jumping into a few discussions and following a few groups I'm interested in. So being busy simply does not cut it.
Maybe it's because the benefits of blogging are not immediate and "in your face"? After all, some business activities translate immediately into quantifiable results so the cause-effect relationship is clear. Blogging is different. With blogging, the benefit often remains hidden until months later when I talk in person with someone at an industry event and they say "I read your blog all the time and think it's good (or not)." When this happens, the activity is validated and you become more motivated to keep in going.
So here I am, back and recommitted to blogging on a regular basis.
Every year I say I'm going to attend the Consumer Electronics Show (CES) in Las Vegas and every year I fail to do so. This year was no different. I said I would go but, instead, I am in the office reading articles and blogs from others who attended and reported back on what's happening there.
Some might wonder why, as the CEO of a business-to-business information company, I would be interested in CES. This is especially true because I am not an early adopter of new technologies or a huge device geek. Instead, I tend to let others try the new stuff out first and then decide whether or not to embrace something.
My reason is this: I believe a significant shift in how innovation spreads has occurred. In the "old days" technological innovation primarily occurred in B-to-B spaces and, as costs gradually came down, the innovation eventually found its way to the consumer.
But today, much of this has flipped. Many of the most innovative ideas are now developing first in the business-to-consumer realm and them migrating to the enterprise. I think the reason for this is rather straight forward. Even though a company sells a service to another company, the actual users of the service are consumers. They are the same people who, in their personal lives, buy mobile devices, bank online, consume digital content and connect with friends electronically. So as people become acquainted with certain services in their personal lives they soon come to expect them in their professional lives as well. This phenomenon forces once separate value propositions to converge.
Apparently, this has been a theme at CES this year as many new devices are being introduced that are always connected to the internet. Rather than primarily differentiating themselves via their core features, these devices are differentiating themselves based upon the applications they can support. For example, new televisions are competing less on traditional TV features and more on their connectedness. According to an article in the New York Times, the TV manufactures know that increasingly "what will differentiate one TV from another is the software it runs and the Internet services it connects to." The same article goes on to include the following quote from the CEO of Nokia; "Hardware is not enough. We (Nokia) need to have a wider array of services and content."
I'm interested in this because I see a similar thing occurring in information publishing as in consumer electronics. For companies like EDR, delivering valuable data is no longer enough. Sure, customers still need to see that our content is high quality and accurate. But you can't sell on those benefits alone anymore. Instead, you have to deliver value around the way people work. For any data and content company, this means that future success lies in creating more value in how customers order, receive, experience, work with, analyze, archive, retrieve and integrate information.
Everything that once was special or unique eventually becomes ordinary and expected. The challenge for business today is to find the "new" special or unique and start bringing it to customers before your competition does.
Like many people who work in the commercial real estate industry, I've spent more than my fair share of time recently talking with customers, investors, lenders and others who I think may have some insight into the markets that goes deeper than what we hear on the news or read in the paper. Most of what I hear back is speculation or anecdotal evidence of things I already believe to be true. However, yesterday I had a conversation with the CEO of a leading commercial real estate research and advisory firm that was truly eye opening. Consider the following:
- In 2007, the total supply of debt capital available for commercial real estate financing was $728 billion. This was split roughly 50/50 between the private market and CMBS.
- In 2009 this supply of debt capital will be reduced to approximately $310 billion.
- Of this $310 billion, $235 billion is needed for refinancing existing mortgages thereby leaving only $75 billion for new deals.
If you then assume LTVs of 60%, then 2009 will produce only $125 billion of transactions. Over the past 4 quarters deal value was $185 billion indicating another 32% decline in the market.
I had hoped that once the 4th quarter of 2008 rolled around, we'd begin to see a leveling out in the market on a year-on-year basis but it doesn't look like that will be the case. Instead, all indicators show continued weakening in demand, debt capital and transactions. Since the Phase I ESA industry is driven by transactions, it too will experience a similar softening. Probably for another year or so. To compound matters, over $20 billion in CRE mortgage balloon payments come due in 2009 which would normally be refinanced. These are the balloons on investment grade properties like office buildings and shopping centers; two asset categories that are beginning to see rises in vacancy rates and drops in rents. Cash flow from these properties is declining at exactly the same time they need to be refinanced and debt capital (let alone willingness) is reaching a new low. What happens then? Do the lenders foreclose and put the properties up for sale? If so, what then happens to the value of comparable properties? Certainly they'll decline even more, right?
This same CEO told me they're forecasting this recession as the worst since World War II and I think that's more or less what we're going to get.
If anyone cares for a good read, especially something relevent in turbulent economic times, I'd recommend The Snowball: Warren Buffett and the Business of Life (Alice Schroeder). As the name implies, the book is less about Buffett's deal making and more about an approach to life; a quality that sets this book apart from most other books about Buffett. For me, there are two key themes that resonate through each chapter.
The first is the ever present concept of fiduciary duty. Whenever someone handed their hard earned money over to Buffett to invest, he felt an enormous, almost sacred, responsibility to them. As a result, he began a habit that would last for years. Each year, he would write an amazingly detailed letter to investors that outlined his thoughts, opinions, and investment strategies. He did this voluntarily and long before corporate disclosure became what it is today. He did this not to cover his tail but because he felt it was the right thing to do for people who placed their trust in him. On multiple occasions he told investors that their money "may" yield a higher return elsewhere even if it caused them to withdraw their funds and take them elsewhere. Talk about leadership! As I was reading this, I couldn't help but think about how Wall Street executives, automobile executives and politicians are behaving today.
Second, and on the negative side, Buffett and his family certainly paid a price for his complete focus on investing. Examples abound throughout the book illustrating a man who was rather detached from his family, distant to his kids and largely uninvolved in major aspects of family life. Some of this was probably due to generational expectations and Buffett's own quirky personality. But I couldn't help feeling somewhat sorry for him and his family. Sure he was building a fortune in his 20's, 30's and 40's but he was also missing out on some of the best things life has to offer.
Finally, and of particular interest to me, was something that I didn't know before. In the 1960's, Buffett owned the Sanborn Map Company. For years, Sanborn had been making detailed maps used by the insurance industry and the board of directors was composed mainly of insurance industry executives. But by the 1950's, this business was in serious decline and profits were rapidly eroding. But hidden behind the scenes at Sanborn was something beyond a map making operation. Sanborn had also accumulated an investment portfolio of $2.5 million and this was growing. However, the company was only being valued based on the map making business. With Sanborn's stock trading at $45 per share, Buffett calculated the value of the investment portfolio to be $65 per share. So buyers of Sanborn at $45 were essentially acquiring an investment portfolio for $.70 on the dollar and getting a mapping operation for free. Buffett's response was to place 35% of his entire partnership assets in Sanborn. In the end, the investment portfolio and map making operations were separated and Buffett closed out his investment.
Recent Comments
- July 21, 2010 - When you finish, I would be curious to know if you feel Benioff's book...
- June 24, 2010 - Provocative post, Rob. A growing # of Phase I firms are moving into...
- August 29, 2009 - Hi Rob: Great annectdote. To answer your question, no our tactics are...
- August 11, 2009 - I wish both of you luck with the selling process. Having recently sold...
- August 11, 2009 - Rob: First, good luck selling the house. I just put mine on the market...