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Considering facilities outsourcing? establish a baseline first. (Real Estate).

Although outsourcing non-core real estate-related services can be an effective strategy, many initiatives prove ineffective. One solution is to establish a baseline assessment prior to outsourcing

Managers within virtually every major industry sector are facing both internal and market-driven pressure to consider outsourcing "non-core" functions such as facilities management, real estate, architecture and engineering or project management, to name a few. The driving motivation for outsourcing arises for a variety of reasons: in response to a lack of internal resources; a requirement to reduce or control operating costs; to focus often limited internal resources on core business competencies; or an interest in leveraging the skill of best-in-class providers.

In response to this demand, an abundance of external service providers are available in the marketplace today, ready to assume responsibility for providing needed services on an outsourced basis. Services can be awarded through a competitive bid process, or negotiated directly between an owner and a pre-qualified service provider. Contracts can range from a fixed-fee arrangement to a cost-plus and management fee basis, to a guaranteed maximum price scenario.

Over the past 10 years, many outsourcing initiatives have either failed or experienced strained relationships due to dissatisfaction with the service provider's performance and/or an inability to effectively control costs. The most common problems include: poorly defined customer expectations; inaccurate workload projections; and inadequate scope definitions, as defined by the client. Any of these can result in a misalignment between the client's expectations and the service provider's initial price proposal.

An equally significant and common challenge of outsourcing real estate services is that many internal managers have been unable to accurately determine (or report to senior management) actual cost savings or operating cost reductions. This may be because "baseline" costs and service provisions were not defined prior to outsourcing. Thus, the owner could not accurately quantify his/her actual cost of operation relative to the financial bid offered by the outsource provider.

Problems also may stem from an aggregation of services within the owner's scope of work, making it difficult to price each service separately. As a result, owners may need to make financial decisions to outsource based only on high-level, aggregated pricing.

By establishing a baseline assessment prior to outsourcing, a company can establish a picture of the current environment and reach a clear understanding of current service level expectations, work volumes and baseline costs. Insufficient resources, or a lack of expertise in collecting, analyzing and documenting the findings, are not good reasons to avoid this critical step. Following is an overview of the concepts and a basic process to establish a baseline assessment.

Step One: Start at the Top. Even though the long-term goal may be to fully outsource the services provided by the real estate department, the scope and service-level expectations must be aligned with your company's critical business drivers.

Therefore, when documenting the scope of work and defining the outsourcing firm's service level agreements (SLAs), you should review the scope of work and SLAs with your major internal customers. Make sure to align the range of services, their scope and SLAs with the long-term needs of the company and its key operating units.

Step Two: Data Gathering. After defining the services to be out-sourced, compile specific data, such as internal staffing allocations, cost of salary and fringe, allocations of corporate overhead costs, materials and supplies, contracted services, as well as annual volumes related to each service. Build a financial model to capture all of this data and calculate a true "total cost" for each service on an annual, activity or unit cost basis, whichever is most appropriate.

This approach is based on the principles of Activity-Based Costing (ABC). Validate that the total costs within your model tie back to your operating statements and/or general ledger reports. This financial information will serve as your "baseline" comparison for the outsourcing bids, as well as the foundation for measuring the selected provider prior to the contract taking effect.

The baseline information could be categorized for different operations and might include such areas as:

Facilities Management: Break down all operating expenses (cleaning, repairs and maintenance, utilities, grounds and security, administrative costs and fixed costs) into separate cost categories on a building-by-building basis. For example, total cleaning costs for Building 1 average $1.35 per rentable square foot, while total repair and maintenance costs for the same building average $1.80 per rentable square foot.

Facility Services: Break down all costs associated with support of the customer/users (project management, space planning, conference room setups, tenant construction, move/add/change, etc.) into separate cost categories by service. For example, total costs for in-house project management services average $1.50 per usable square foot; space chargeback services average $0.05 per square foot; call center services average $30 per work order, etc.

Real Estate: Break down all costs associated with managing the real estate portfolio (transaction management, lease administration, architectural services, space management, strategic planning, etc.) into separate cost categories by service (see box above for examples). As the examples indicate, each distinct service may have a unique cost driver (or metric) used to measure and evaluate its cost.

Step Three: Benchmarking. Prior to going to bid, a company should gather current benchmark data on average costs for each of the services being considered for outsourcing. This will help you evaluate the request for proposal (RFP) development/bid, and also predict potential cost-reduction opportunities.

In some instances, published industry benchmarks are available (such as BOMA and IFMA for building operating costs). In other cases -- such as average unit costs for project management, design services, real estate services, etc. -- published industry benchmarks do not exist. However, this information is available through peer organizations, or other resources such as vendors and consultants. If done accurately, this information is also helpful in establishing a case for outsourcing or not.

Next Steps

Once the scope of work, SLAs and baseline financials have been accurately established, this information can be used to prepare a clear and concise request for proposal (RIEP). It is essential that the RFP accurately articulates your service expectations, projected volumes and measurement criteria so that the bidding organizations can adequately determine how to approach, staff and price their services.

It is equally important to provide a detailed set of pricing models so bidders can price the various services at the same level of detail used to capture your baseline costs.

Elimination of ambiguity, clarity of specifications and a realistic context will contribute significantly to a healthy and successful outsourcing relationship. There are many different outsourcing structures that work, many good providers and a wealth of opportunities to choose from to reduce costs. But, without knowing where you are starting from or where you are trying to go, it's hard to know if you ever got there.

RELATED ARTICLE: Real Estate Services: Sample Cost Baseline

* Average total cost, lease administration: $1,500 per lease/per year

* Average full-service architectural and engineering fees: $4 per usable square foot

* Average tenant representative (lease acquisition) services: $4.50 per rentable square foot

Cost drivers: Cost per rentable square foot, cost per usable square foot, cost per activity or cost per year -- depending on the specific activity.

Scott S. Tibbo is director of Real Estate Advisory Services for Expense Management Solutions, Boston, a consulting firm specializing in benchmarking, administering outsourcing bids and improving operational effectiveness in real estate, facilities management and administrative services. He can be reached at tibbo@expensemanagement.com.
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Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Tibbo, Scott S.
Publication:Financial Executive
Article Type:Column
Geographic Code:1USA
Date:Sep 1, 2002
Words:1242
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