Cutting the cost of managing corporate facilities.

In Corporate America, premises expenses consume an average of nearly 20 percent of a company's annual operating budget. In most cases, it is possible to bring these costs down significantly through better facilities management. For companies occupying large properties, reducing these costs even three to five percent can amount to a savings of hundreds of thousands of dollars on the corporate income statement.

These savings can be realized for virtually any type of corporate real estate, including office space, manufacturing facilities, R&D, and retail sales locations; regardless of whether the premises are owned or leased. One of the most effective ways to lower premises expenses is by outsourcing facilities management to a qualified facilities management company.

Outsourcing, the process of farming out non-core business functions to carefully selected service providers, is perhaps the most useful corporate strategy to emerge from the economic turbulence of the last several years. Applied successfully across an increasingly broad range of disciplines, outsourcing frees corporations to focus on key elements of their business, reduces the need for in-house staff, provides generally higher quality services at a lower cost, and offers the flexibility of using only the level of services that are needed.

At the most basic level, corporate facilities management comprises routine, day-to-day services such as cleaning, security, maintenance, repairs and overseeing vendors and subcontractors. It may also involve more complex functions, such as the development and implementation of emergency preparedness programs, corporate relocation programs and energy reduction programs. In a multi-tenant building, facilities management may also include financial "watchdog" functions such as the auditing of common area expenses and pass-throughs.

Outsourcing facilities management functions to a qualified facility management company not only addresses all of these concerns, but meets the primary goal of providing corporations with state-of-the-art, practical advice on reducing occupancy costs. Years of specialized experience enables management service providers to evaluate existing building systems and programs and to discern areas in which a different approach could result in substantial cost savings.

Additionally, facility management companies are able to provide all-important benchmarking figures: including a history of cost comparisons for operating expenses and building services, as well as an evaluation of what level of service is really necessary.

Other benefits of outsourcing facilities management include:

FLEXIBILITY

Outsourcing caters to the uncertainties of corporate growth and contraction, enabling expansion of services without hiring full-time employees, and the reduction of services without in-house staffing cuts. When the company is in a growth cycle, outsourcing may supplement existing staff in such activities as organizing corporate relocations, or supervising building improvements.

In a contraction period, the level of service can be adjusted accordingly. This flexibility applies to other building needs as well, such as maintenance. An in -house manager might employ several full-time maintenance people: an effective number in the event of a problem, but excessive on a day-to-day basis. A facility management company, however, can simply deploy additional maintenance staff to an individual building as needed, circulating these employees throughout an entire management portfolio.

EFFICIENCY

This is the main attraction of outsourcing. Because the facility management company handles day-to-day issues such as maintenance and repairs, internal real estate staffers are free to focus on core job functions. This means the corporate person in charge of leasing can focus on lease negotiations, rather than taking time out to call the janitorial service and find out why the trash cans on the third floor of building X were not emptied.

This is also an improvement from the point of view of the corporate space user, inasmuch as even mundane problems and occurrences are handled immediately by the facility manager, whose entire focus is building management. An in-house staffer with multiple responsibilities might only be able to address the item at a subsequent date and time.

ECONOMIES OF SCALE

When a particular building is added to a facility manager's portfolio, the property is likely to benefit from the manager's established relationships with vendors, and quantity-discount contracts. A good facility management company develops partnering relationships with key vendors, making these service providers part of the property management team.

The result is increased trust, responsiveness and results. The cost of services is often lower, reflecting the purchasing power of the facilities management provider. This is in addition to the long-run savings generated simply because problems are handled correctly the first time.

GETTING STARTED

The first step in the process of converting to outsourced facilities management is for the facility management company to conduct a complete analysis of existing facilities, operations, organizations and budgets. From this study, the facility manager should provide recommendations regarding advisability, costs and benefits of outsourcing as it relates to the individual company. These finding should be reviewed with the client, and, if outsourcing is advantageous to the client's business, the management company should submit a proposal for services.

CASE STUDY:

Northwest Asset Management Co., was recently retained by a financial institution to provide facilities management for a 100,000 square foot, leased building. In evaluating operating costs. Northwest determined that the building was costing almost $2.40 per square foot more to operate than comparable buildings in the area with similar uses. Assessing the situation. Northwest determined that the excess costs reflected a history of changes in use of the facility.

Over the course of several years, a series of modifications of the base building systems (HVAC, electrical, life-safety, etc.) had been made to accommodate the immediate needs of the client.

These changes were designed to require the least possible expenditure of capital, without regard to their effect on the cost of building operation. The modifications, which were made to enable the building to support a small data center, included the conversion of a substantial portion of the HVAC system to produce chilled water to cool the computers, changes in the electrical system to provide uninterruptible power through the use of batteries and generators, and the installation of a security system to limit access to critical data operations.

As the business grew, additional modifications were added to increase operating capacity. Eventually, the data center operation outgrew the physical capacity of the facility, both in terms of square footage, and the necessary operating environment. As a result, the client chose to relocate some key aspects of its business, including the data center, to another building. The existing building was retained to handle less critical functions and provide additional office space. The existing building systems, however, were not readjusted to reflect the new usage of the building.

Northwest conducted a thorough study of the building and how the client was using the facility, including what hours each department was operating, and what facility services were actually necessary, including the level of security, use of uninterruptible power, degree of air conditioning, etc. Following the study, Northwest developed a plan to implement a series of changes that would modify the operating systems in order to reduce energy usage, and better match building services to the needs of the occupants.

At the request of the client, the plan included a payback of twelve months or less on any significant capital improvements or repair. Within four months, Northwest was able to lower the client's operating expenses over $200,000 per year, on an investment of less than $40,000.

LOOKING AHEAD

As national and international competition forces Corporate America to further intensify its focus on streamlining operations and achieving peak efficiency, outsourcing facilities management will become only a first step in a much broader re-evaluation of corporate facilities costs.

James L. Morgensen is a Vice President at Northwest Asset Management, and the head of the company's Facilities Management Group. Gregory J. Dumas is an Executive Vice President in charge of Northwest's Downtown Los Angeles Office. The largest independently owned property and asset management firm in Northern California. Northwest Asset Management Co. is headquartered in the San Francisco Bay Area and manages a portfolio in excess of 16 million square feet.