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orporate real estate managers with outsourcing contracts coming up for renewal have a unique opportunity, which is to hear how the provider of the service defines what has come to be known as “second-generation outsourcing.” If that provider cannot articulate how the next chapter in a service provider agreement will be better than the one drawing to a close, then there’s the justification for shopping around for a new vendor.
Most companies with real estate departments learned years ago the value of not doing it all on their own — that companies with expertise in facilities management, lease management and other key areas are better equipped to handle those functions than a department with a mandate to shrink itself. So they know all about first-generation outsourcing. Site Selection quizzed several service providers to glean their insights into just what second-generation outsourcing is and what their clients will gain from it.
“To me, second generation outsourcing encapsulates three key ingredients,” says Ed McLaughlin, chairman and CEO of United Systems Integrators (USI) Corp. (www.usirealestate.com), Stamford, Conn. “One is a systems integrator approach, which is the packaging of the series of service areas — from design, project management and transactional services to legal review services, research and demographic services –and it’s marrying those together through a single, integrated platform.
“The second area is about strategic savings, which can be divided into three buckets,” he continues. These are hard, tangible savings that can be measured, such as rent and space-requirement reductions, “where you really attack rate and volume, which are the two key cost drivers in real estate,” says McLaughlin. “The second area here is cost avoidance — money that would have been spent otherwise that you helped the client avoid spending.” The third type of strategic savings is the intangible savings, which brings value, “but at this point and time in our economy, what people are most interested in are the hard savings first, cost avoidance second and the soft benefits third.”
The final component in a second-generation outsourcing agreement, says McLaughlin, is “wrapping the offering together with technology that truly is Web-enabled, that allows you to manage and measure workflow so that the whole concept of benchmarking is something that is handled by the creative use of technology.”
Adds Andrew Goldstrum, USI’s managing director, Southeast region, “More efficient delivery of services provides for reduced cycle times and better outcomes.” Goldstrum works in the firm’s Atlanta office.
First generation outsourcing was largely a broker-referral system, or a preferred-service relationship, says McLaughlin. But outsourcing has a far more strategic role in most corporations today, one requiring the attention of the “C suite,” including the chief financial officer, even the CEO. “The newest role in establishing these strategic relationships is the chief sourcing officer,” he notes, referring to an emerging role at many companies that resembles a senior executive level procurement officer. “It’s a community of people making these decisions that would best benefit the corporation.”
Bryan Jacobs, vice president at Jones Lang LaSalle (www.am.joneslanglasalle.com), in Los Angeles, concurs. “Depending on the industry, you do see procurement taking on a more strategic role. You see that in manufacturing and in areas where the supply chain and sourcing of it is considered an important part of the business. But if if you look at outsourcing as a vendor relationship and as a supplier to your process, you can miss a few things. Purchasing services and purchasing goods and materials are two different exercises, and you can’t always boil a service down to a cost per unit to select the best service provider.” Too much is at stake.
Other aspects of the client-service provider relationship have evolved, as well, in the new generation of outsourcing contracts.
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“As existing contracts come up for review, firms are looking for a much more candid overview of the cost benefit from both our service provider perspective as well as from their perspective,” says Ross Ford, president of Plano, Texas-based TCN Worldwide (www.tcnworldwide.com), a global consortium of independent commercial real estate firms. “The trend seems to be toward more open books, setting the stage for a true partnership, a structure where both firms are [in agreement] about [deliverables] and the cost of that delivery process. It also relates to the benefits and cost savings the client is looking for and matching those in an open-book format that allows both parties to be satisfied and comfortable with the relationship.”
Ford says he encourages the principals in the TCN member firms to not approach business as being afraid of losing something, but rather to seek to build partnerships with clients in order to benefit both parties. “Our goal is to improve what we’re doing on both sides of the table,” he says, “and if that includes asking the client to possibly change some of their processes, then you don’t step away from that. You enhance your ability to present yourself as a valid supplier of services in this process if you’re trying to improve your client as well. Any time reevaluation occurs, that creates opportunity, and that bodes well for everybody, because it’s a chance for growth and expansion.”
Mile High Properties (milehighproperties.com), a Denver-based affiliate of TCN Worldwide, takes the partnership mandate seriously. That firm’s goal is to not just provide client service where property assets are concerned, but to help the client make money. “Instead of being a fee generator to our clients, we want to be an income producer for them,” says Jeffrey Steinberg, vice president. “We provide opportunities for clients to generate income off of what they have rather than just paying fees to have someone manage what they have.”
Osma Carroll, Jr., Mile High’s chief operating officer puts it this way: “At the end of the day, the term revenue generator means what it means.” Carroll successfully won the business of Xcel Enegy, a Minneapolis utility, when its contract with Staubach Management came up for renewal. (As president of that organization, Carroll won the Xcel business there in 1996, as well.) Xcel maintains a portfolio of about 5 million sq. ft. (464,500 sq. m.).
“We have formed a co-marketing venture with Xcel’s sales and marketing division to help them sell their products and services,” says Carroll, explaining the nature of the partnership it espouses. “In Texas, we’re actively helping them sell their kilowatt hours. Across the country, we will be introducing Xcel as our alliance partner to pension funds and other corporate clients, showing that market segment that we are truly integrated. We go hand in hand with one brochure, one business card, and we’re selling an integrated service package.” This depth of partnership requires both parties to assume risk associated with new business ventures, which Carroll says is just fine. “We have to both have skin in the game, and we have to go forward promoting and selling each others’ services as if we’re one company.”
Xcel Energy management feel the same way. “We believe strongly in the partnership alliance relationship, especially with our outsourcing contract,” says Al Lucas, managing director, corporate real estate and facilities, in Minneapolis. “We try to consolidate under one contract as much as we can and gain economies of scale so we can reduce costs to the corporation. Having a partner like Mile High who is willing to work with our internal retail group to help them expand their markets through partnership arrangements makes the relationship even stronger.” Xcel outsources to Mile High the janitorial, HVAC, facilities management call center operations, project management and print/mail record keeping functions.
“We watch and manage our contracts very closely,” adds Lucas. “Cost is a big part of that, but we want quality service at competitive prices. So we have to manage to that level. So far, we are very happy. It’s early on in the process, but we believe this partnership will work out well.”
Steinberg uses the analogy of a marriage to explain the concept. “A good way of saying it is ‘in sickness and in health, until death do us part.’ You’re in it together. The goal is collective rather than independent.”
Mile High is taking this particular tack because it is a concrete and attractive way to demonstrate value. Most service providers would agree that there is only so much expense that can be cut from a client’s real estate operation. Trimming the fat and reducing costs may have justified the service provider’s fee in the past, but that no longer is enough.
“The secret to our success will be integration,” says Carroll. “We’ve brought in an outside high-tech company who is also partnering with us and with Xcel to deliver an Internet-based integrated service solution. But in the long run, what we really want to do is to perfect the sales and marketing arrangement, and prove that we can help clients generate revenues. That creates a revenue source for the client, and it turns their overhead sales and marketing organization into a profit-driven organization.”
Such alliances are becoming more commonplace as more companies move into second generation outsourcing contracts. “The comfort level of corporate America has increased pretty dramatically as it relates to alliance partners,” says Ellen M. Scherer, senior vice president, Americas and EMEA at Trammell Crow Co., in Norcross, Ga. “We’re beyond that concept of ‘I can’t put all my eggs in one basket.’ It has become a true partnership.”
As companies become more comfortable with the concept of strategic alliances, they become more sensitive to service redundancies, says Scherer. Economic forces and corporate restructuring nurtures this sensitivity. “When you have multiple alliance partners, those redundancies emerge. Whether it’s on the corporate side or on the service provider side, you’ll have multiple layers of management, multiple people doing the same types of things,” she points out. “I look at second generation outsourcing as really taking advantage of the redundancies and being able to streamline and improve both the efficiencies and the cost effectiveness of the alliances.”
And service expectation levels are rising, Scherer notes. This sometimes means calling in reinforcements from outside the account team. “It’s important to leverage the entire service provider company,” she says. “It’s bringing in the services and the skill sets that are required based on what the customer is looking for. It’s going outside the account team and integrating from an entire service provider standpoint to bring the right resources in. Corporations are looking more to be able to leverage the relationship, and that means that a service provider who has broader experience could have an edge over someone else.
A New Role for Technology
Technology is playing an ever-more-important role in the new generation of outsourcing contracts. The Internet and other systems have dramatically improved service providers’ ability to communicate with clients, manage projects and portfolios and meet performance expectations.
“Second generation outsourcing isn’t so much about new services as it is about leveraging technology, leveraging people to deliver the services in better ways and to add more value,” says Jacobs of Jones Lang LaSalle. “In the case of one client, the first generation results had to do with collecting metrics, gathering data and setting a standardized process for managing the portfolio. Many times, when we first go into an outsourcing situation, we’re fixing something that is broken, cleaning up data, normalizing a portfolio that’s been acquired through merger and acquisition.
“The second generation,” says Jacobs, “is about introducing Web-based, self-service programs for work order management, using extranet portals to manage transactions and projects across a large geography so that you don’t have the travel costs and the people costs of managing those projects. It’s leveraging technology and people to add value.”
John W. Davis, executive managing director in the Los Angeles office of CB Richard Ellis (www.cbre.com), concurs. “One of the major reasons corporations should outsource is the ability to tap into technology the outsourcing providers are building without having to do that themselves. All of us run national or global technology or call-center-type operations that they can tap right into at minimal expense.”
Clients’ use of such systems can make processes more efficient and reduce the number of people required to manage the real estate function. The key is for both parties to view real estate functions objectively and to be in agreement as to how they can best be managed. “If you don’t change processes or implement any new technology, and you’re just doing the same thing you were doing before, then there’s no reason necessarily to outsource,” says Davis. “These are the things that many of the corporate outsourcing decision makers tend to focus on.”
