Does Building a New HQ Guarantee Growth?

Over the years, I have been asked if building a new headquarters will increase the credit union’s growth. CEOs and boards say people who design and build facilities tout this benefit in their presentations. The answer is that building a headquarters does not, on its own, guarantee growth. In fact, this undertaking may even reduce a credit union’s ability to growth. Why do some credit unions boom and others stagnate after completing a big building project? Success hinges on the activities surrounding the planning, building and occupancy process.

I have participated in and observed hundreds of HQ projects, both successes and failures. Based on my work with credit union CEOs and boards shepherding facilities projects from start to finish, I’ve assembled this short list of factors associated with the highest level of return.

Develop a comprehensive, unbiased strategic occupancy plan. This plan analyzes five-, 10-, 15- and 20-year occupancy requirements based on likely business scenarios linking business, community, brand and budget goals. It addresses the full range of occupancy options to enhance understanding of the real differences in cost over time. For example, leasing is typically the lowest cost for the first seven to eight years, but when you look out 20 years, the difference between owning and leasing could be $10 million to $15 million in favor of ownership. This dynamic was the deciding factor recently for a $780 million credit union that opted to build a new HQ rather than lease. It is applying the long-term savings to right-size and position its branch network to take advantage of more liberal field of membership guidelines and invest in new technologies. 

A strategic occupancy plan can help supply answers to crucial questions: How can we afford this? Will our current market, lines of business, branch network, brand, staffing model and technologies support growth projections? Do we need to expand or change our FOM? Do we need to find merger partners? Is our branch network efficient and productive, or should it be reimagined? Do we need to put more emphasis on small business banking and wealth management? How will technology allow us to grow without branches? In terms of impact on growth, these and other questions related to the financial implications of an HQ project lead to refining a plan that aligns with business objectives, brand development, short- and long-term staff support, and targeted marketing.

Organizations that have forged ahead without this type of planning offer a cautionary tale. One credit union in the Southeast built an HQ double the size needed for 50 years in an area with low demand for leasing to other businesses. At completion, the building was worth only 75 percent of the cost to build it. Unfortunately, this is not an uncommon example of good intentions gone bad as a result of lack of scenario development and objective analysis. And by “objective,” I mean planning with a partner that will not benefit financially based on your decisions. Architects, contractors, design/build companies and Realtors all play key roles in an HQ project, but they may be biased toward certain options, and strategic occupancy planning is not their core competency.

Assemble the right team. Credit unions have several options in structuring this project team:

1. Hire a local architect and contractor. This is a great community strategy and expresses your commitment to local businesses and community financial health. On the other hand, few markets offer consultants with substantial financial industry expertise or nationally recognized ability to plan and design financial institution headquarters.
2. Hire a design/build firm. National D/B firms offer good design and construction services. While they are often from out of town, most employ local contractors and support the community in the end. A key advantage is a single point of contact throughout the process, which makes it simpler. A potential drawback is lack of objectivity, with no separation between the architect who should be representing your singular interests and the contractor benefiting from design decisions. For many organizations, the benefit of simplicity overshadows the possible negatives.
3. Hire an experienced facility consultant. The consultant’s role is to develop your strategic occupancy plan and real estate strategies and to monitor the entire project—to serve as an unbiased, trusted advocate for the CEO and board. The consultant can lead the architect and contractor selection process, ensure brand translation, assist in real estate activities, review contracts, monitor schedules and budgets, and provide high-level input at every point in process. In a few cases, design firms want their signature on the building deign rather than designing to a credit union’s brand attributes. I’ve also heard of some friction when a contractor or design/build contractor has reacted negatively to consultant oversight of its value engineering and design process. Still, hiring a good consultant to provide a global perspective should reduce rather than increase project costs by bring a high level of knowledge across a variety interrelated issues, such as Realtor agreements on sales, purchase, lease and building lease management, and brand application matching location potential.

Most successful projects are contracted using a negotiated/bid process in which the architect and contractor or design/build firm bid their fees for overhead and profit as a percentage of construction costs. Then each firm’s qualifications are analyzed to facilitate selection. This process provides early engagement with the contractor for pricing at each phase of design, value engineering (an organized effort between the credit union, architect and contractor to ensure the new building delivers high performance and a strong brand experience at the most reasonable cost before the drawings are done), significantly fewer change orders and good relationships throughout the process. A smooth flowing project delivered on time and budget impacts growth by limiting risk to other credit union initiatives.

Stress-test every major facility project. I am currently working with a credit union through the planning, design and construction of a new HQ and branch. One design/build firm under consideration generously provided a financial analysis showing that, based on high growth potential, the credit union could afford to build the proposed building. But what if the economy changes, the credit union undergoes a merger, or competition erodes key market segments? Stress testing considers those possibilities. We conducted stress testing for this project using a variety of business scenarios to understand the bottom-line impact under a variety of possible conditions. This provides better confidence for the board and executive team that the project is viable and demonstrates for regulators a high level of sophistication. Stress testing also provides the added security of identifying funds available for growth initiatives in addition to facility development.

We will continue this discussion in the April column, with an exploration of how strong management facilitates effective facility planning aligned with organizational growth.

Paul Seibert is an independent consultant under Paul Seibert Consulting, Seattle.