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Getting outsourcing business.

The climate of Corporate America is changing. Burfeted by storms of competition, threatened by shrinking margins and accelerating customer demands, corporations are becoming lean and costconscious. As a result, the corporate umbrellas that once sheltered hundreds of workers are now being manned by skeleton crews.

Corporations on the cutting edge of change now assign many necessary but non-core business tasks to specialized outsiders. (For an overview of outsourcing and some case studies, see the article "Picking Up the Pieces: Opportunities in Corporate Outsourcing" in the January/February 1993 issue of JPM. )

A recent study of corporate real estate executives sponsored by NACORE and Ernst & Young found that 54 percent of those surveyed already outsourced some real estate services and that half of the remaining respondents were exploring outsourcing options.

Outsourcing allows a corporate real estate department to continue to perform essential real estate functions, yet remain responsive and flexible to the corporation's real estate needs.

Outsourcing also offers opportunities to many service providers. And more and more property management firms are scrambling to get in on the action,

To help managers understand how to compete in this exciting new market, five facilities managers from the corporate world shared their views with JPM on outsourcing and what corporations seek when they outsource their facilities management, property management, and other real estate functions.

The outsourcing evolution

Business analysts and corporate officers alike believe that outsourcing is more than a mere stop-gap measure to ease companies through difficult times. According to columnist William Neikirk (Chicago Tribune, February 21, 1993), outsourcing is part of a "fundamental restructuring of jobs, industry, and institutions in post-Cold War America."

Stephen Bell, second vice president of Facilities and Asset Management at The New England, one of the 20 largest insurance companies in the country, states, "This is a long-term change. I think a lot of facilities managers on the East Coast want to avoid it, and their managers are going to do it for them if they're not careful."

Outsourcing, when successful, allows corporations to reduce expenses. In the category of personnel and training, for example, a service company, unlike an in-house department, can spread expenses over a number of clients. Also, because real estate professionals employed by a real estate company work in that company's core business competency, turnover is ideally reduced, and career advancement opportunities are more plentiful.

Thomas E. Wynn, formerly at IBM and now CEO of Axion Real Estate Management, explains, "My experience at IBM was that you get a fairly high level of turnover in real estate functions.

These are not the prime activities for which these large corporations are known, and when you apply for a job at IBM, you do not necessarily apply to operate the buildings."

Employees in non-core business functions eventually want to move on, says Wynn. And if upper management does not move them to a desired division, morale problems inevitably result.

Hiring, training, and other management concerns make facilities management and other real estate departments extremely expensive to operate. When the company uses a service provider, on the other hand, part of the vendor's job is to hire and train employees and keep their skills at the level needed to deliver services effectively.

Outsourcing also reduces a company's risk of turmoil from layoffs if it hires outsiders. Kit Tuveson, facilities operations manager at Hewlett-Packard, states that when a company is extremely committed to the people it hires, it "has to be very careful about staffing up in times of uncertainty or variability." Alliances with service providers, he states, allow corporations the flexibility to remain committed to long-term employees.

John Englert, director of property management at Eastman Kodak Company, explains that because corporations do not make the same kinds of investments to improve support functions that they must make to compete in their core business activities, outside service companies have learned to perform these functions more efficiently.

"The realization when people look at service levels and cost structures," he states, "is that companies on the outside which have made these functions their core competencies can probably provide a higher level of service, at less cost."

Red flags for corporations

In spite of the fact that lowering costs is one of the major advantages of outsourcing, corporations are not necessarily looking for the lowest bidder when they seek a service provider. In fact, a low bid often places a service company out of the running.

Jack Brophy, CPM[TM] vice president and director of real estate administration for USG Properties, USG Corporation, believes that outsourcing, especially in the short term, does not always save a firm money. Furthermore, he states, saving money is not nearly as important as adding value to the real estate function.

Bell contends that one of the biggest reasons for outsourcing failures is a low fee estimate by the service provider. "I think if someone comes in with a very low price to take over the facilities function, corporations need to be very wary," he says.

Similarly, Englert remarks, "We're looking for a service provider who has demonstrated its core competencies, not someone who's in there on a wholesale basis to try and make a fast buck."

As an example of a service provider who adds value, Englert describes Kodak's alliance with a cleaning vendor. The vendor's processes cut the cleaning cycle in half, allowing Kodak to turn off the lights four hours earlier every day. Often, he states, Kodak looks for partnerships with companies that not only offer more expertise in a particular function, but also add value in nonrelated areas--in this case, energy savings.

Another red flag is a company with no proven track record in the area for which it claims expertise. "What makes the most important difference in property management," Tuveson states, "is a good track record. What you've done is a much better predictor than what you say you're going to do"

To select a vendor, a corporation ideally looks at a list of competitors who are in that particular business not as a sideline, but as a primary endeavor. "Just as companies are deciding to outsource so they can focus on their prime business," Wynn comments, "they ought to be outsourcing to companies whose prime business is managing facilities."

An indication of problems for Brophy is high employee turnover at a vendor. "Real estate is still a people business," says Brophy, "and the ability to keep a set of highly skilled people at the company is all-important."

Problems often arise when the management of a property relies too heavily on the skills of one manager. "It's a lot like the chef in one of your favorite restaurants," says Brophy. "If the chef changes, it could be either good or bad."

A strong, stable staff at all management levels is the way to avoid this risk.

Corporate requirements

All corporate officers interviewed agreed they were looking for companies that can deliver long-term relationships and that are willing to adapt to make that relationship work.

States Wynn, "Once a corporation decides to outsource its facilities management business, it is creating a marriage. Especially if it turns over its building systems and facilities management employees to another company, the corporation wants to be sure that relationship is going to endure for the long haul."

One big concern on the corporate side is avoiding a service company that takes over facilities management and later folds.

Corporations also want to protect former employees whose positions have been eliminated by outsourcing. "Most companies are very concerned about their people and will want to discuss the placement of those people with the vendor," acknowledges Wynn.

If a vendor does hire corporate employees, corporations inevitably ask, "How are these people going to be treated?" Bell describes a corporation that gave a contract to a service provider with the agreement that the service company would hire all of the corporation's facilities management employees. Within a year, those same employees were laid off. Corporations cannot afford the negative public perceptions these situations bring with them.

Just as mutual trust is absolutely necessary if a marriage is to last, trust is a terribly important element of outsourcing. States Brophy, "The fuel of outsourcing is trust, That's also probably the Achilles heel of the whole process."

Brophy believes that a lack of trust is one reason outsourcing in the brokerage arena is often flawed. An in-house broker makes every effort to get the lowest price or rental rate for a property, whereas an outside broker knows that if the rate obtained is just under the client's limit, going any lower might jeopardize the deal--or at the very least, may lower the commission obtained. Rewards based on trust are not even part of the process.

States Brophy, "The vendor has got to act not like a broker, but as if the property is his or her own"

He also contends that one reason that outsourcing the property management function often works is the on-going, repetitive nature of management operations. Because processes reoccur, the two parties can establish goals and define expectations clearly. The continued presence of specific expectations for well-defined tasks is a situation that lends itself to mutual trust.

The final winning qualification, according to Brophy, is close attention to financial details. "The mentality that the tenants will pay for it is a hangover from the '80s,' he states. "If you can save money for the property owner, the tenant, or even yourself, you should do it."

The two specific areas Brophy pinpoints for close scrutiny are the lowering of maintenance of tax assessments and high-quality but cost-effective building security.

According to Tuveson, Hewlett Packard analyzes potential vendors on the basis of several criteria that receive numerical scores weighted according to the importance of each criterion to a particular property.

These criteria are summarized by the acronym TQRDCE, which stands for technology, quality, responsiveness, dependability, cost, and environment. The successful service company, he states, has technological and quality program capabilities that match those at Hewlett-Packard.

H-P definitely looks for total quality management (TQM) standards and goals. The corporation asks about the specific tools the potential vendor uses to continually improve processes, as well as the criteria the company has for measuring customer satisfaction and overall performance.

"By asking a number of questions in the quality area and getting specific answers, you can see how well the company responds to putting quality as one of the values of potential services," says Tuveson.

Technological capabilities are also important. Hewlett-Packard asks potential vendors how they can bring new technological solutions to the delivery of services. It is one thing if the contender describes the capabilities of the software it uses; another if it states that a manual system has always served its purposes well.

On the basis of scores obtained for written answers to such questions, HewlettPackard then compiles a list of the top two or three contenders for a particular site. On-site evaluations and personal interviews tell the rest of the story.


Corporations obviously have very specific, hard-to-achieve standards for the companies they choose for outsourcing partnerships. Property management firms must be well prepared for the task, as corporate clients demand no less than the best in every arena.

Englert summarizes the requirements corporations have for real estate service providers as follows:

* The service offered is the company's core competency.

* The company is capable of delivering a long-term relationship.

* The company follows TQM principles and practices.

* The company is "best in class" in its business.

* Services are cost effective.

* Its human resource principles are


* The management company delivers top-notch building security.

Outsourcing is clearly not for every management company. But for those with the skills and the commitment to understanding and adapting to the corporate culture, outsourcing offers the possibility of long-term, profitable employment.

Dorothy Walton is a freelance writer based in Chicago. She was previously a developmental book editor for the Institute of Real Estate Management. She has also designed and taught courses in English as a Foreign Language in Madrid.
COPYRIGHT 1993 National Association of Realtors
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Title Annotation:includes related article
Author:Walton, Dorothy
Publication:Journal of Property Management
Date:Sep 1, 1993
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