Balancing Act: Exponential Sales, Cutting Expenses

The latest CFO Innovation Business Outlook Survey finds sharply increased optimism among CFOs regarding the growth prospects of Asia’s economies and businesses in the first quarter of 2013. Regus, the US$1.9-billion-in-revenues global provider of business centre office spaces, is bullish as well.
 
“We’re looking at some new markets, we’re looking at expanding some of our mature markets, and we’re looking at opportunities in markets that we’ve had a footprint in, but where we haven’t expanded to the extent we believe exists in terms of opportunity,” says John Henderson, the company’s Asia Pacific CFO who is based in regional headquarters in Hong Kong.
 
At the same time, however, he is making sure costs don’t spiral out of control as the company focuses on growth. “We have a general rule of thumb about what we think is an appropriate level of spend,” says Henderson.
 
In this final part of a three-part interview with CFO Innovation’s Cesar Bacani, he talks about expansion, cost management, forecasting and other issues in an enterprise that has been growing by leaps and bounds despite the unsettled global economic climate. Excerpts:
 
Regus is clearly in growth mode in Asia, having grown revenues almost exponentially in the past 18 months.
Yes, we’re looking at some new markets, we’re looking at expanding some of our mature markets, and we’re looking at opportunities in markets that we’ve had a footprint in, but we haven’t expanded to the extent we believe exists in terms of opportunity.
 
Like Indonesia, huge population, natural resources . . . We have a very good business in Indonesia. We opened in Cambodia recently. That’s our first centre there, a brand new market for us. We opened in Sri Lanka about a month or so ago.
 
New markets are coming online and we’re looking at opportunities where they make sense for us to be and where our customers would like to be. Where people want to do business, that’s where Regus wants to put space.
 
We’ve just gone through the exercise of putting a country manager into some of our smaller markets, including Thailand, Indonesia and Vietnam. We have looked forward to what we think our growth trajectory might look like and all of these markets now justify having resources added to them.
 
We create that easy landing point for companies that want to come into these markets. A simple one-page contract and you can be up and running in less than 24 hours, instead of having to find your space, fit it out and sign a contract and do all of these legal stuff.
 
You can be in Regus and working, supported by multilingual staff who understand the local market.  You get immediate access to information point for “how do I get this done” or “where do I look to get that done.” Regus provides that very comfortable arrival into a new market.
 
So you’re moving on from mature markets like Australia and Japan?
No, our growth strategy is across the board. We’re looking to deepen our footprint in existing markets where we have already built very strong brand presence and we are also looking to new markets. We will be where business is being done.
 
‘Mature’ for us means the maturity of a business centre in its life cycle, as well as being a mature market. So, yes, Australia and Japan are mature markets.
 
China is a mature market, too, but it’s also a growing market. The opportunity in China is enormous. I think there are over 200 cities with populations of more than a million. All of those provide us with an opportunity.
 
You add to that an expanding consumer market in China – Chinese people want to do business now across their own country, so we’re looking to see where it fits with Regus to be there to support local expansion within that market. And so we’re looking at cities that we have not been in before.
 
Even the big cities like Shanghai and Beijing, we’ve hardly scratched the surface. If you compare the number of centres in Beijing [Regus currently has 12] to the number of centres in London [Regus has 56 there], you think Beijing should be able to carry the same numbers. We’ve got lots of opportunity.
 
Cambodia and Indonesia – Southeast Asia would seem to be prime growth areas for Regus, especially with the creation of the ASEAN common market in 2015.
Historically we have treated Southeast Asia as a cluster, so we had a head of Southeast Asia who managed effectively six countries.
 
But if you want to invest in growth and understand and focus on the opportunity in the market, you really need to align resources with the market. You need to make the connections, meet the landlords, get out there and understand where the demand is. You can do those things much more effectively [with a country head] than you can if you’re trying to manage it [from a cluster].
 
Let’s talk about the cost side of the equation. How do you balance spending on expansion and growth, and the need to manage costs?
We look at our mature businesses and make sure that they’re performing on a consistent basis, that we are driving margin in that business, keeping our occupancy high. They then become a cash cow that allows us to invest.
 
Our business is very much driven by a number of things as our key indicators. The occupancy [rate] in each of our business centres is a key factor to driving our top line. Our average price that we earn is another key factor.
 
We have various reports that are generated through our invoicing and billing systems that help us understand the occupancy not just today, but looking forward. So we have our forward order books that look at how much contractual business we have in the business, and what price that’s at and what value that is at.
 
We also have a number of historical information on customer spend on various services that we offer. We look on what people are spending on IT, on telephone calls. We look at those trends over period and we try to understand why it’s moving the direction it is.
 
If we see IT usage dropping, we’ll see if there is something wrong. Are there pricing issues? Are there products we’re not offering? Have we kept up with market demand? Then we’ll develop our products. We introduce new products based on trends that we see.
 
Are there any areas where finance can actually control costs?
We at Finance gate-keep all the costs . . . Lining up resource by market means we actually reduce our travel because people are not having to fly into markets. We’ve cut our travel down considerably.
 
Regus has a fantastic network of video-conferencing facilities and Telepresence studios, so we use our own products to manage our own business effectively, which again is a good way of keeping cost down. So whilst we spend time talking to each other, we don’t necessarily spend a lot of time travelling around.
 
But I imagine T&E isn’t really a big part of your costs.
It’s not really, to be perfectly honest. Our sales teams are obviously talking to the market, they’re talking to agents and customers, but the rest of our staff don’t necessarily have a lot of need to be out there entertaining, per se.
 
The latest CFO Innovation Business Outlook Survey finds that companies in Asia are refocusing on sales, marketing and distribution.
Marketing is a big cost in any business. We [in Finance] look at all the expenditure and we will work with marketing to make sure that we understand marketing efficiency. We look to see that we balance marketing across our portfolio.
 
If we’re very full [in business-centre occupancy] in a particular market, we’re going to move to more maintenance marketing in that market. Whereas if you’ve got occupancy availability or you’re bring new centres online, you want to generate more buzz in that market, so more marketing will be directed to that market.
 
We have a general rule of thumb about what we think is an appropriate level of spend and it’s very much driven by the enquiries that we need [to generate from potential customers], how effective we are at converting [the enquiries into occupancy], how much space we need to fill.
 
What about operating costs like wages and utilities?
Usually there are two points in the year when salaries are reviewed and we know when those are and we build assumptions around those. You gain a lot of that salary review information from finance and we manage it with HR to work out what is it we’re going to do in each market.
  
Do you own your business centres?
No, they’re leased long-term, depending on the market – in India, for example, it can be nine years. On average, our leases are for five years.
 
Our cost base is mainly made up of leases, associated property costs and people. So you can plot those out for the life of those leases and as those costs get slotted in. We know when leases are coming up for renewal, we know roughly what markets are going to do, we take some market intelligence on where the property cycle is, what’s happening with current rents versus market rents. So we have a lot of benchmarks that we use.
 
Forecasting revenue is more difficult.
Our revenue forecasting is always more challenging . . . We make assumptions: This is where we know we are today; as we look forward, we see our prices strengthening, that’s a good indicator that we are going to see some improvement [in revenues]. Maybe we’d take a shave off [the revenue forecast], take a more conservative view, but these are the indicators that we look at.
 
And how does the revenue forecast look like against the actuality?
In 2012, I had a fairly accurate forecast. But it can be challenging, when you’re dealing [with situations] like the earthquake in Japan. Nobody can foresee the effect of that.
 
The fact is that it had a very interesting effect [on Regus]. A lot of expatriates left Tokyo [and hit occupancy rates of the company’s business centres there]. But all of our second-tier cities in Japan were absolutely full, as companies decentralised. So Osaka, Kyoto and so on.
 
You had this positive and negative happening at the same time. You couldn’t have forecast that.
 
But net-net, it all evened out?

I think it broadly evened out. And it also left us with an opportunity to fill Tokyo back up again. Tokyo’s a great market for us. It’s a very profitable market when we get strong occupancy in there.  

 

Click here to read Part 1 of this interview 

Click here to read Part 2 of this interview

 

Photo credit: shutterstock 

 

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