Also, below is a transcript of the podcast episode:
Jim Hunt: This is Jim hunt for Bramasol’s Insights to Action podcast series. Today we’re really lucky to have John Froelich, Vice President of Marketing and Strategy at Bramasol and we’re going to dive into an interesting topic on active lease management. What is it and how can it improve your free cash flow? So welcome John. It’s good to have you here today.
John Froelich: Hi Jim. It’s great to be here like all the rest of the world from home.
Jim Hunt: We’re all working from home and we’ll touch on that too because it plays into the discussion we’re going to have. So to start with, maybe you can give us an overview on what active lease management means.
John Froelich: Jim, you know, that’s a great question. We get asked a lot and we hear about a lot. It’s like the difference between active anything and passive, anything. Active is did you get involved in it and you manage it actively and do something. Whereas passive you let things happen. So let’s talk about active lease management. What that means. When we think of lease management, we think of the key aspects of managing any lease and those are the decision to make or execute a lease. The onboarding of that lease, the ongoing lifecycle management of that lease. And then finally the end of life or end if you will, of course of that lease and what it means by active lease management. Let’s compare and contrast. If I were a passive lease manager, I would create a lease at the beginning of the year, let’s say for a forklift or a truck or a building and set it on autopilot and I’m done.
And when the end of the lease comes, I just hope we remember to terminate the lease and take care of that. And I don’t really look at leasing as anything more than a process, anything more than something that just happens. What’s contrast that with active lease management, active lease management. Jim means that you go in and you take active interaction and you set KPIs and you set some indicators. So even from the beginning, you’re looking at your lease portfolio and making decisions about whether that is a finance lease or an operational lease. Is it something that you’re going to use up the useful life of it and you’re just financing the use of that? Or is it an operational lease in which something else occurs and you’re just using part of the lease? Right? And the difference between those is whether or not you expense that or capitalize it.
John Froelich: And we’ll talk about what that means later on. But once you’ve made that decision and you’ve entered that into the system, you begin to look at your lease portfolio and as part of the portfolio, you can actively manage and look at that lease as part of a bigger picture and understand exactly where does that lease fit in my portfolio against my banks. Do I have a certain number of leases with that company and therefore I can get better rates? And we’ll talk about that too. Um, and as you go through the process, you’re always managing the life cycle of that lease, your ongoing look at the valuations of that. Can I renegotiate? Is there an impairment or a casualty against that lease? What are my options? And we’ll talk about it more relative to some of the real estate leases which are important as well. And then as you near the end of life, you’re making decisions about do I renew this lease or is it something that I don’t want to renew? What does it look like? And can I get better terms if I extend my lease? Um, the difference between the two passively, you just sit back and manage an expense stream and assume that the asset is taken care of. Whereas in active lease management, you’re looking at different timings and different aspects of that lease portfolio to improve and optimize processes.
Jim Hunt: That’s a good overview. One of the things about this podcast, we’re going to talk about how active lease management helps optimize your cash flow and your cash management. So, talk a little bit about how those things relate.
John Froelich: Yeah. Well, you know, how those relate is obviously, you know, leases have many aspects to them. The first one is of course a lease is money out the door, right? It’s cashflow, it’s money heading out the door. And so you want to manage that process. You also have an opportunity through subleasing to bring money back in the door and manage that process. So if you have real estate, let’s say you have a hundred thousand square feet of real estate, and you realize through today’s events that you no longer need a hundred thousand square feet, you want to go to 70,000, uh, and you try and renegotiate with your landlord and the landlord lets you renegotiate 70,000, but really 50,000 might be more closely aligned to what you need. So you can go out and renegotiate or sublet. And the great thing of course about subletting is now it’s income that helps defer some of those costs. And in some cases, month to month sublets, um, get you a higher rate. So it’s cashflow in, right? So you see this cash flow in and helps mitigate all of those expenses. So you know, that’s one in which that happens, right?
Jim Hunt: Right, and given the times that we’re in with the COVID-19 crisis going on, cash has become much more important and the scenario you just described is going to, as we move to the new normal, there’s going to be a lot of adjustments being made to how much real estate you have and your facility utilization. If a large number of people stay home, we’re doing more work from home, facility needs are going to change. So if you don’t have a good handle on your leases, and it probably plays somewhat into operating leases for equipment as well, so those things mean active lease management it seems could be very apropos to the current situation we’re in and getting to the next new normal.
John Froelich: Yeah. You know, Jim, I’m glad you mentioned that because you know, what we’re finding is that a lot of attention during this crisis and going forward has been opened up on areas such as revenue, accounting, treasury, and lease management. And what we’re seeing in a recent PWC study is that over three quarters of CFOs are voicing significant concern about the impact of COVID-19. Very few of them find that it’s not impacting their business. Um, some are finding positive impacts, uh, believe it or not, and some are having negative impacts. Uh, but we do know that three, three quarters of CFOs find that it’s an impact. And the major areas for concern for them are number one, the potential of a global recession, and I think we’re starting to see that as we saw the U S unemployment rate creep up to levels we haven’t seen since world war two really, with over 14.7% unemployment, some businesses shuttering, and others going out of business.
John Froelich: So that’s a big deal. But the financial impact is just as important and it’s if these effects on the results of operations, they’re viewed of future periods, their ability to get cash and be liquid and use capital resources. Um, but when they say where is their focus, it’s, it’s on the things that they can impact, right? So the potential global recessions, not something they can impact, but what they can impact is what goes on in their business. And one place that they’re really focused cost containment. And that’s why we decided to start focusing in on talking about active lease management because active lease management can help you do two basic things. Number one is conserve and manage cash and then help you with your impact EBITDA, right? Which is your earnings before interest, depreciation, taxes and adjustments. So you know, that, that’s why we thought active lease management was important.
Jim Hunt: Yeah. And let’s talk a little bit about global companies that have a lot of operating units and how they can benefit from distributed decision making at the business unit level on operating leases and so on. But they need to also have centralized management and a good transparent overview of what’s going on throughout the enterprise. So how does active lease management and the tools we’re talking about play into that centralized versus decentralized decision?
John Froelich: Well, Jim, I’ll tell you, there’s a couple of places, certainly as you begin to look at your space utilization. But more importantly, as you begin to create visibility into your lease portfolio, you can begin to understand what are the opportunities. So for example, in SAP CLM and other solutions, you can drill down and take a look at, where are all my leases? And let’s assume that you notice through your analytics that there seems to be a spike in activity towards the end of the quarter, beginning of the next quarter. You can drill into that and figure out, Oh Hey look, I have a whole bunch of leases that are coming up for renewal with ABC Shared Leasing Space Company Inc. And you notice that a preponderance of those seem to be in relatively similar locations.
Well, maybe you could consolidate those together and bring them all into one space and that might be a way for you to save money on unused space. Another opportunity would be to say, look, you know what Jim, I’m really interested in continuing to do business with shared space leasing corporation. We see you as a strategic partner, but you know, with all this space I rent, what can you do for me in terms of helping me with my bottom line? Can you help me improve the terms of my lease, lower the interest rates? Could you help me with managing common area maintenance? Can you help me with understanding how I might allocate my space more effectively and get better usage out of it? Are you willing to give me a break on rates. Maybe he would come back and say, look, John, I can’t renegotiate the terms of your lease, but I’ll tell you what, I’ll give you a rent abatement. I’ll give you three months free. That’s an opening, right?
Jim Hunt: Yeah. So having that visibility instead of having it be piecemeal with different business units, negotiating with ABC leasing, you have that visibility, and that knowledge helps you in your negotiating posture.
John Froelich: Yes, and vice versa. You may have too many leases with one and you want to manage your exposures. Right. We talked a lot about managing exposures in many of our other webinars and you know, if you’re not sure how this company’s doing and you don’t want to have too much of your lease portfolio exposed with somebody else, perhaps you want to spread the love a little bit more. And by using a tool that gives you that look and actively managing that lease portfolio, you can, you can certainly have that impact.
Jim Hunt: And, talking about visibility, can we talk a little bit about evergreen leases, sometimes I call them zombie leases because they may just go on and on and you don’t know about them.
John Froelich: Absolutely. So evergreen lease is a concept wherein it’s an auto renew and it’s called evergreen because if you think of a pine tree, it’s evergreen and just stays there. Green. The challenge with evergreen leases is, let’s say you lease a car for four years or you lease a PC, and I think PCs are probably even a better example. I’m leasing a PC, I’m leasing an asset and I’ve had it for a long time. The terms automatically renew and I’m paying for this thing except it’s a four year old PC and somebody just stuck it in the closet and I’m not using it anymore. Or it’s a 15 year old forklift and I don’t really use that one anymore. It’s on a lease and I just park it in the corner and don’t manage it anymore. I just assume that somebody has arranged for terms or somebody to come pick this thing up and take it back. And of course with an evergreen lease, if you’re not actively managing it, nobody ever comes. The leasing company’s not going to say, Hey Jim, you know that cash you’ve been sending me, stop sending me all that cash. Right,
Jim Hunt: Right. And if you don’t close the loop between the lease out there in an operating unit for that forklift that is evergreen, it goes on and on. If you don’t close that loop with your central finance organization that’s paying the lease payments, you may never know because neither party is triggered to bring up what do we do about this?
John Froelich: Right, and that’s why, you know, active lease management also involves things like thinking about segregation of duties and workflows because the workflow would create an automatic alert at the end of the lease or 90 days before the end of the lease to say, Hey, you know, you might want to think about this, whether you want to renew the lease and you can get in front of it instead of having to wait and do a report at the end of the month and the end of the year or the end of two years and say, Oh my God, look at all these leases. I’m paying for things I don’t use. And of course, paying for things you don’t use. Who wants to do that? Right? I mean, it’s like the gym membership that I never use. I don’t want to pay for that. Right.
Jim Hunt: I have one of those too. And we can’t even go to the gym right now. There you go. So that brings up one other kind of side point. With so many people working from home, including finance, personnel, admin staff and so on, those workflows, and some segregation of duties and integrated processes become even more important, and especially security.
John Froelich: Absolutely. Jim. And you know, we, we were talking about this on a call recently with a friend of mine, Kevin McCollum, uh, at SAP. And, um, you, you and I know and we all know, anybody who’s been successful at relationships knows that the fundamental building blocks of any relationship is trust. And we call this, in this case, digital trust. And how can you be sure that you have everything in place to ensure that the information and data that you share with other people and that you get is true and accurate and not intended to do bad things.
John Froelich: And so in this remote space, what you do is if you have a system that’s based on digital trust, like an SAP system where there’s strict requirements and you have workflows and things get done in an automated fashion, you don’t have to go into a panic when people go remote. And of course as I hope that we see that people realize remote working is more possible and that as we do that there are tools out there like a SAP CLM to help you do that and actively manage your leases and you don’t have to physically be in a building to do that. Right.
Jim Hunt: Very good point. You know, we’ve only got two or three minutes left, but I’d really like the listeners to be able to understand how do they go about the next steps, how do they implement, how do they, you mentioned CLM, some of the tools. How do I get to active lease manage and take advantage of it.
John Froelich: Yeah. So you know, let’s talk about the key takeaways. You know, we know that everybody is looking for ways to conserve cash. I know I am. You are, you know, I’ve cut out a lot of spending I didn’t do before. And so to CFOs and with SAP CLM with active lease management that can help. So you have the proactive use of data. You can begin to aggregate data together, use analytics and tools and you have embedded workflows and alerts that help you with that. Some of the low hanging fruit areas are things like impairments and casualties. You know, what’s happened with that forklift that fell over carrying a case of toilet paper, um, impacts the banking or lessors via consolidation. Can I save money doing that? And what is the power of visibility to provide insight to action? So with a tool like that, what we can do at Bramasol is we’ve developed a low cost rapid implementation program that takes around six to eight weeks and works for customers who want to do a net new leasing solution. They want to get away from their spreadsheets, get away from their pieces of paper and use an integrated solution or companies using a, a non-integrated third party solution. And they want to bring that in and we can do both of those in about six to eight weeks. And for a cost, I think people will find very attractive.
Jim Hunt: That six to eight weeks is amazing.
John Froelich: Yeah. Hopefully we’ll all be out of this COVID by six to eight weeks.
Jim Hunt: Right. We can cross our fingers. That’s a great, great overview. I know Bramasol does, in our series of webinars, we have a webinar coming up that will drill down much deeper and show some visuals on demos of CLM and active lease management. So we’ll certainly have a link to that webinar and then the subsequent video posted along with this podcast. But this has been a great overview. I really appreciate your time today.
John Froelich: Well, thank you so much Jim. I enjoyed it very much as always and I look forward to some of our further discussions about solution economy and other topics.
Jim Hunt: Absolutely have a good day staying at home. Thank you.
Thank you for listening to this episode of Bramasol’s Insight to Action podcast series. We hope that you found it helpful to ensure that you never miss a future episode. You can subscribe to Bramasol at iTunes or wherever you get your podcasts. For more information about Bramasol and detail on our solutions for compliance optimization and financial transformation, please visit www.bramasol.com or email us at [email protected].