Outsourcing corporate real estate functions to save money is the right move for the wrong reason. It’s a strategy that may appear successful at first, but will eventually leave a company in an inferior competitive position. Over the past ten years, real estate and facilities management has evolved from a largely tactical corporate function to one capable of delivering strategic value throughout an organisation. Companies that recognise this evolution are better positioned for success.
In the past, the metrics of corporate real estate (CRE) success were limited to cost containment and the ability to secure space when and where business unit leaders requested it. Today, workplace, facility and location strategies contribute strongly to employee engagement, worker productivity, recruiting, risk avoidance and more.
Increasingly, companies are tapping professional real estate services firms to get the greatest possible value from facilities and workplace operations. As reported in Jones Lang LaSalle’s Global Corporate Real Estate Trends 2013 (GCRES) survey, 66 per cent of corporate real estate directors agree with the statement that outsourcing “represents a strategic relationship, where I assess longer-term value-add with a partner,” while only 15 per cent believe that “outsourcing represents a tactical transaction, mainly with the lowest cost provider.”
If CRE directors understand the strategic value of their function, many are not convinced that sourcing and procurement professionals do. The GCRES survey found that procurement professionals are involved in CRE sourcing decisions at 69 per cent of companies, but, in 58 per cent of those cases, procurement professionals are perceived as lacking the in-depth knowledge of real estate to make fully informed sourcing decisions.
Real estate and facilities services are not a commodity
The danger is in thinking of facilities management and related functions as a commodity service, a notion that leads less-informed companies and their procurement teams to favour low-cost providers. Real estate is a critical corporate function with great complexity, embedded into company operations and affecting a company’s financial, cultural and operational stability. Even if a company’s main goal is to minimise cost, the incremental savings achieved by a low-cost provider are likely to be overshadowed by the long-term efficiencies and productivity improvements that can be realised by a more sophisticated real estate services provider.
Real estate is the second- or third-largest expense line item for many companies, so minimising cost is a given and should always be a goal. Even for the best-run corporate real estate departments, a third-party facilities management partner usually can achieve substantial savings.
A company that outsources its facility management and lease administration for the first time is going to see some significant benefits fairly quickly, regardless of which partner or partners are selected. Initial savings come from renegotiating vendor contracts, implementing ways to use existing space more effectively, reducing energy use and disposing of or subletting unused real estate. While some teams may be better at driving down costs than others, at this stage most real estate service providers are capable of delivering strong results.
However, the real value of a provider relationship is in the expertise and innovation that a dedicated facilities partner can bring to the table. A full-service partner can help the in-house CRE team enhance employee productivity, optimise balance-sheet and P&L impact, and meet strategic goals in areas ranging from M&A to sustainability.
Determining the right mix of in-house and outsourced services, and choosing the best partner for the long term, requires careful consideration of intangibles such as reputation, cultural chemistry and mutual trust. In addition, the quality and sophistication of real estate and facilities services can affect many other departments:
- C-suite Strategy. Real estate occupancy is a long-term commitment in a fast-changing world. The ability to “see around corners” and to prepare for contingencies can be critical if your company grows quickly or contracts unexpectedly. In addition, as businesses see opportunities to expand manufacturing or sales operations globally, it’s good to have a real estate partner with experience in those markets.
- Human Resources. Everything from the location of offices to the appeal of the work environment can affect the recruitment and retention of knowledge workers. Employee productivity is also greatly affected by workplace factors such as office layout, comfort and the flexibility of the space to serve a range of needs.
- Information Technology. Mobile and in-office technology enable more work to be done outside the office, making professionals more efficient while requiring less space per employee. Increased mobility also means facilities and IT must work together in maintaining a fully wired workplace.
- Logistics. The location, design and management of facilities are factors present in every link in the supply chain, from distribution centres to retail outlets and bank branches.
- Finance. Real estate strategies should always align with financial goals. A partner can help determine whether it’s best to lease or own a facility, how to get the most out of surplus properties, and which facilities are most in need of capital expenditures.
- Risk Management. Facilities managers can improve disaster preparedness and speed up the recovery process; maintain mission-critical facilities like data centres and call centres with zero downtime; and ensure safety and regulatory compliance.
Unexpected expertise: specialised services from real estate service providers
Full-service real estate and facilities providers can also help companies in industries with specialised facilities needs, allowing the client company to focus on its unique mission. Examples include life science companies with regulated space in lab facilities, investment banks with trading floors, and banks with large branch networks and high-security data centres. For these industry-specific needs, a company is best served by a real estate services partner with a track record in supporting specialised environments.
Performance is impossible to gauge without metrics, of course, so something to watch for in making sourcing decisions is the provider’s emphasis on measurable goals. It’s true that you can’t manage what you can’t measure; but the process of developing metrics can often point to methods for improving performance.
It’s equally important to develop an atmosphere of mutual trust in the early stages of the outsourcing relationship. Ideally, the service provider will cultivate this trust by performing above expectations, and by demonstrating an understanding of ways that real estate can further the company’s strategic goals. Again, the value of the outsourced partner is not only the ability to cut costs, but also the ability to bring new ideas to the work – the opposite behaviour of a commodity service.
It is only through developing trust that the partnership will expand to include the value-added, customised strategies down the road that can reduce cost even more and further corporate goals. If the initial sourcing decision was made on a commodity basis, these more advanced services may not be available or adequate – so the value of the relationship may stagnate. By taking the long view in making real estate and facilities sourcing decisions, a company can ensure that this aspect of operations will be in a position to continually improve processes and productivity, and enhance both the top and the bottom lines.
This article originally appeared in Outsource magazine Issue #35 Spring 2014.
About the Author