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Picking up the pieces: opportunities in corporate outsourcing.

Few in the business world today are unaware that corporations are under intense pressure to cut their unneeded overhead and improve their income. "Rightsizing" has become the latest management buzzword--symbolizing the decisions of corporations to focus on their core businesses and leave secondary concerns to others.

The end result of this pruning is yet another buzzword of the nineties--"out-sourcing," or "out-tasking." By retaining an outside provider for all or significant portions of a major activity--such as payroll, accounting, or mail services--corporations can reduce operational costs and gain flexibility in using only levels of service that are needed.

Real estate is one major area corporate executives are targeting for outsourcing. In a large, publicly held company, real estate (including corporate headquarters, other office space, and industrial space) may account for 25 to 35 percent of assets. Efficient management of a corporation's facilities obviously presents an enormous opportunity to cut costs. Selling, leasing, or changing the use of some facilities provides the options of raising capital or reducing debt.

William R. Beak, president of Rubloff Strategic Management in Chicago, states that when corporate executives realize that real estate is a number-two or a number-three line item cost, they start looking for ways to reduce the costs for running their facilities.

Phil Rogers, CPM |R~, vice president, Eastern Region, of Axiom Real Estate Management, Inc., pinpoints more reasons corporations are taking a hard look at their real estate departments. "The cost of handling the back-of-the-house structure has escalated dramatically," he states. "Years ago, Peter Drucker estimated that to provide support services costs a company roughly 10 percent of the total cost of operations.

"On the same theme, a couple of years ago, Drucker came out with a very interesting article called 'Sell the Mailroom,' in which he estimates that it takes 40 percent of the total cost structure to run support services." Such services might include mailrooms, cafeterias, maintenance, security, printing, graphics, supplies, and landscaping.

Corporations achieve several advantages by cutting the real estate department in charge of their properties to the bare bones. First and foremost, they can focus on the core business (which may be manufacturing, computer services, or anything else unrelated to real estate). Also, they can reduce non-core business staff, lowering benefit costs and salaries.

Second, they are able to pay for services as they need them instead of on a continuous basis. Tied to this advantage is the fact that an outside real estate service is accountable on a "fee" basis, not on a "free" basis. Accountability for costs and requested services is thus greatly increased.

Finally, outside real estate firms often offer state-of-the-art expertise and objective advice in a wider variety of areas than is normally found in an in-house staff. You get a group of specialists instead of one or two generalists to solve your problems.

Who is outsourcing?

In answer to the question, "What sorts of corporations are outsourcing their real estate services?", many real estate professionals working with these clients suggest, "Everyone." Joe M. Hudec, president and CEO of Premisys Real Estate Services, a subsidiary of the Prudential Insurance Company, thinks that any large corporation in a business other than real estate has a need to outsource the management of at least some of their owner-occupied facilities.

William Beak lists financial services, high-tech industries, insurance, and other service providers as industries that are typically outsourcing real estate services. Insurance companies are outsourcing property management services not only for their own corporate facilities, but also for properties that they or their pension fund clients own.

Hudec suggests focusing on corporations that have more than 1 million square feet of office space. Phil Rogers states that corporations that are particularly receptive to outside real estate services have administrative headquarters or regional offices that are in the range of 0.5 million to 1.5 million square feet. The average population count for those facilities, he states, ranges from 500 to 5,500 employees.

Beak adds that in a survey undertaken by Rubloff, the need for outside real estate services was particularly high among corporations that already have in-house real estate staffs. This need occurs because the demands on the real estate function are increasing at the same time that many in-house real estate staffs are being reduced.

The trend for most corporations, Beak predicts, will be to keep a core real estate staff that is much more concerned with planning strategy and overseeing the process, and much less involved in implementing the day-to-day activities. Many of these tasks will be outsourced.

Facilities management needs

One of the services corporations need most is something property managers are ideally positioned to provide: facilities management. Services needed include cleaning, security, maintenance, repairs, overseeing subcontractors, and others traditionally under the umbrella of property management services.

Aside from the forces behind outsourcing in general, corporations look to outsourcing facilities management as a means of receiving cutting-edge practical advice on operations and achieving occupancy cost reduction. The costs for providing support services within corporations skyrocketed in recent years partly because of the lack of benchmarking and competition. What a property management company can offer a corporation is a history of cost comparisons for services and an evaluation of what level of service is really necessary.

Beak remarks that real estate companies with years of experience negotiating contracts for services such as HVAC maintenance, elevator maintenance, and cleaning have developed the ability to win contracts that may be more efficient, but still achieve the same quality standard that corporations are expecting.

Hudec agrees: "The real estate company has a depth of experience and resources in subcontracting services and in establishing acceptable benchmarks. They manage other properties, and they can tell you how the job is being done in other places."

Ron Puntil of Axiom Real Estate Management, Inc., remarks that his company is typically able to manage a building less expensively than the corporation was previously doing. "Part of that," he states, "is bringing what I call industry standards to the building, as opposed to just coming in and finding a less expensive way to do things.

"Over time, many companies start to develop practices that are typically not necessary to the business. We're able to come in and bring the focus that a corporate owner would have if it were a tenant in the building as opposed to being the owner. Corporate owners have often become more demanding or have added more staff than is necessary to provide first-class office building services."

Hudec adds that volume discounts are also a big plus. His company, Premisys Real Estate Services, provides facilities management for third parties as well as for its parent company, The Prudential Insurance Company. Unlike a typical corporation, Premisys is able to get reductions from service-contract vendors because it does so much work in those areas.

At the same time, a large property management company may offer the service flexibility essential to meeting a corporation's needs. For example, one company previously kept four maintenance workers on staff at all times. The four were necessary for troubleshoot problems at a moment's notice, but they rarely had enough work to keep them in business in non-crisis situations.

The third-party property management firm was able to use the same four staff people to troubleshoot all of the properties in its portfolio, so the corporation had to pay for the staff only when it was actually working at its property.

The same flexibility also allows the outside management firm to bring more staff to bear on short-term problems, such as analysis of an option to purchase or an environmental problem.

Also in the cost-cutting department, the payroll cost of a real estate company is typically less than it would be for a corporation. Large corporations have built up benefit packages that include generous insurance and retirement programs, while most real estate companies have tried to keep these costs down. This means that it will cost the real estate company less to provide the same facilities management service, even with the same number of personnel on its payroll.

Strategic planning needs

Corporate needs for real estate assistance encompass not only daily operations, but transactions such as leasing, subleasing, buying, selling, and financing. This area is nothing new for most corporations, many of which have hired third parties to lease, buy, or sell space for many years. The trend, however, is that corporations are retaining fewer personnel on staff to oversee these activities, so that opportunities for third parties are greater.

The scope of the transaction services required may also be greater. Because the overall strategy of the corporation (e.g., control costs and raise capital) and the strategy for the corporation's real estate (e.g., value enhancement) may be more tightly linked, the corporation often needs advice on strategic planning for its facilities. The strategy may involve selling a building, leasing back some of the corporation's space, refinancing, or raising capital from alternate use of space.

Thomas O'Connor, vice president of the Trammel Crow Corporate Services Group, states that more and more corporations are looking for advisors to help them relate real estate functions to the company's overall strategic objectives. One major plus an outside expert in real estate can provide is to give a scaled-back corporate real estate division more time--and perspective--to focus on strategy.

"Generally," states O'Connor, "by helping shift their focus from day-to-day transactions, you give a corporation's real estate staff more time. Instead of focusing on negotiating a small lease, they can focus on whether or not properties should be leased or owned."

In addition to freeing up time for strategic planning by handling transactions, a real estate company can also provide fresh ideas, an outsider's perspective, and cutting-edge transactional advice.

Rogers describes strategic planning from a property management perspective as looking at all the assets a corporation holds and asking the following kinds of questions: "Does it make the best sense to own and operate, or lease? Would it help to sublease some of the space? Lease back some of the space to the owner? Stay out of the market or in the market? Should the corporation consider renewing early? Is the corporation paying too much?"

Hudec advises corporations by looking at their tax position, cash flow, and equity. "Their building might be a way to raise capital," he states. "Perhaps they could use the equity in the property rather than having it tied up." His company also has the ability to survey and value properties.

One client that exemplifies what a corporation might need in this area wanted to sell all its properties on a world-wide basis. The first task for Premisys was to identify where the properties were. At times, Hudec remarks, finding out exactly what the company owns or leases and where it is becomes a major part of the process.

Because downsizing has in the recent past often been part of the rightsizing process, another major consideration might be finding the best use for excess space. Mark Goode, CEO of Corporate Realty Advisors, Inc., and Richard Hanson, vice chairman of Stein and Company (both of which are soon to form a joint venture called Millennium to service corporate clients), comment that disposition of vacant space is a service in high demand.

Goode says, "Corporations are trying to become more efficient, both in office and industrial space use. They usually wish to either sublease that space or sell it."

Other needed services

Other areas in which a corporation might need outside real estate expertise include: program management (which might involve overseeing space design and construction or handling large remodeling projects); environmental assessments; ADA audits; utility audits; real estate tax reviews; and space planning.

A service many corporations are just beginning to require is lease administration. This usually includes putting all the information together that relates to a corporation's leasing obligations. Some corporations take the process one step further by outsourcing the responsibilities to manage and administer those leases. Lease administration could include escalation reviews; informing the corporation about renewal opportunities, options to purchase, options to expand, or cancellation notices; and in some cases, making the rental payments.

Hudec comments, "It's surprising how many corporations do not have a good accounting system that tracks all of the leases they have around the country."

One service Premisys provides is to track all the leases, where they are, how large they are, and when the rents are due, and then to make the rental payments. Any of this information is supplied to the client instantly, on demand. This is in contrast to one client's previous system, through which it took two to three days to establish what the company was paying per month for a certain lease in a certain city.

Finally, extending facilities management to cover administrative services is another area in which a corporation may need outside help. By selecting, managing, and paying all vendors, the management company becomes a one-stop shopping source for the corporation. Subcontracted vendor services might include mailroom services; secretarial support; telephone hook-ups; conference centers; computer centers; or cafeterias and vending machines.

Goode and Hanson emphasize the ability to offer a full array of services to corporations. Goode remarks, "Because corporate real estate executives are now being asked to do so much, and they do not have much time, they appreciate help in selecting vendors. The interview process involved in selecting vendors is very tedious, and they're going to try to limit the number of vendors they go to.

"If they can establish one primary vendor--such as a real estate corporation that handles all real estate transactions, manages the facilities, and even subcontracts the cafeteria staff--so much the better."

Responding to corporate needs?

Not all property management firms will be able to provide the cost-cutting and other services required by corporate clients.

Hudec remarks that while the real estate company does not necessarily need to be a nationally based entity, it does need to be able to provide fairly extensive services. "A management company really ought to have a large organization so that it can price its services competitively and reach multiple locations while maintaining competitive standards of service."

The ability to provide brokerage is also an advantage, but a real estate firm can always look outside for sales or leasing brokerage services. Premisys, for example, does not have in-house sales brokerage, but the company helps clients identify brokers when needed. Axiom outsources brokerage, appraisal, and other services to its parent company, Grubb & Ellis.

Beak comments that while in-house leasing brokerage services are not necessary, access to market data is: "The service provider has to be able to tell the client if renewal rates are appropriate or not and to help the corporation make decisions such as whether or not it should consider renewing early."

High-quality service, unlike brokerage, is a number-one, absolute necessity. O'Connor remarks that corporations still have a large quality appetite. Because of this, facilities management is more difficult than managing properties for individual investors. "When you have the owner one level above you, a short walk away," says O'Connor, "and he finds a cigarette butt on the floor, well, you have to reflect a different service level--it really has to be top-notch. There has to be minute attention to detail."

He goes on to say that the only way to be successful with these kinds of clients is to find a way to provide that level of service on a cost-effective basis.

Rogers agrees, stating that an appropriate infrastructure has to be there in order to meet a corporation's needs. His advice to property managers is never promise more than you can deliver: The service level required by corporations is usually much higher than the norm.

Hudec sums up the requisites for servicing corporate clients by stating that if the property management firm does not have state-of-the-art accounting and operations technology, good quality control, service flexibility, and high service standards, the company cannot be competitive in this field.

Making a successful corporate match

There are also other, less tangible requirements for working successfully with corporate clients. Beak describes these prerequisites as highly sensitive people skills and the ability to understand corporate cultures. One reason corporations have such stringent service standards is that they want a high degree of control over their environments, which are usually their corporate home.

One of the issues a service provider has to address when negotiating with a corporation is convincing the company that it will still have the same day-to-day control over its environment.

The quality issue plays a role in many corporate cultures as part of a total quality management (TQM) program, in which the corporation places emphasis on constantly improving quality for its own clients, for others within the organization, and with vendors who service it.

"There has to be a buy-in--mentally, spiritually, and physically--into the TQM culture," states Beak, "and some companies go to extremes. The service provider has to have a comparable TQM program."

You also have to use sharp communications skills to find out exactly what the company's objectives are and whether or not they are realistic. States Beak: "A company may want to have four carpenters available at a moment's notice. But once you go through the exercise of what is important, it may be determined that there's really not a cost-benefit relationship to keeping four carpenters on staff."

Beak also sees a relationship-driven culture, rather than a one-time transaction mentality, as crucial to success in managing property for a corporation. "That attitude has to be present, not just between the two managers, but throughout the organizations," he states. "If you have a corporation that's going to select a service provider based on pricing, then that's pretty good evidence that there's not a partnering mentality. And that's a big red flag."

Likewise, for many traditional real estate firms that have in the past depended on brokerage and commissions for income, a long-term partnering mentality could present an obstacle.

Finally, O'Connor makes the point that the service provider has to be able to work with corporate problem-solving and decision-making techniques. "People in the real estate business are much more prone to act," he states, "while the corporate approach is much more deliberate. Many real estate practitioners have been criticized for a ready-fire-aim mentality. On the corporate side, they're much more prone to a ready-aim-fire approach."

O'Connor also says that a corporate decision is more often than not the product of multiple inputs, which can be frustrating for a service provider who wants to speak to the one person (usually nonexistent) who makes the necessary decision. In sum, he states, the real estate service provider should be ready to take a team approach.

Summary

The economic pressures, national and global, that are forcing corporate America to concentrate on core business efforts and cut down on extras are not transitory. Most experts agree that outsourcing reflects a structural change in the way corporations and their service providers will have to do business in the foreseeable future.

The area of facilities management and real estate-related services is becoming an ever wider window of opportunity for real estate practitioners to bring experience, advice, and industry standards to corporations who need them.

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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Author:Walton, Dorothy
Publication:Journal of Property Management
Date:Jan 1, 1993
Words:3235
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