Posts Tagged ‘real estate outsourcing’

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Meeting and Defeating the High Cost of Occupancy

Wednesday, May 29th, 2013

By Phillip Infelise, Managing Principal

Real estate rents are rising again, leaving many users believing they are at the mercy of the market. Of course, rent does make up a large portion of costs to house your organization and management is typically highly sensitive to these costs, but we suggest you take a broader view – consider that Complete Cost of Occupancy (CCO). The CCO is made up of more than just the quoted rent, and your organization can directly impact it. Here is a summary of just some of those cost items and some quick strategies for controlling them:

Rent Expense
If rents in your area are rising, a review of your current lease and an analysis of options to minimize expense over the long term may be in order. A “blend and extend” approach may be the answer for you in a market forecast to rise. In any case, look beyond base rate and consider the annual rent escalations and the base year used for expenses. Avoid using the same real estate broker to represent you that also represents the building owner, as this is a known conflict of interest. A tenant representative will support your objectives, save you money, and put you in a better position to control costs.

Operating Expense
If you lease, you may have rights to audit operating expenses and reduce them. Carefully scrutinize all pass-through and space measurements. If you own, look at every building system and see where savings can be uncovered. Controlling power consumption will yield big dividends so consider using occupancy sensors to control lights and convert those lights to modern bulbs. Set heating and cooling systems to comfort levels that are not excessive in either direction and automate controls if deemed cost-effective. In many cities this is a big year for real estate tax increases, and while inevitable, you need to confirm that valuations are accurate and the pass-through is consistent with your lease terms.

Space Planning
Engage your own space planner, or ask your project manager to do so. If you are offered the landlord’s space planner, be cautious. These planners are not motivated to plan you into the most efficient space because they get paid for higher SF and the landlord benefits from you paying on that higher SF for years to come. A space planner with your interests in mind could save you 5% to 10% in overall SF and that’s worth much more over the life of a lease than a few dollars saved in rent.

Tenant Improvements
The tenant improvement allowance provided by the landlord may seem adequate, but do not let the landlord get back a large percentage of that money by 1) requiring to use their space planner as cited above, 2) Requiring you to use “their” general contractor, and/or 3) charging a management fee to oversee their own profit-generating relationships with that planner or general contractor. Engage a third party project manager to mitigate both.

Project Management
Engaging a professional project manager to help structure your team and manage the process may not be a bottom-line cost, but rather a cost reduction (often returning 2x to 3x the investment). They know the market better than you internal people can, and they free your staff up to do the business of supporting your customers. A market experienced PM knows all of the tricks of the trade to deliver your project on schedule, and cost-savings that exceed their fees. A wise choice.

Furniture
An investment in new configurations can reduce your overall real estate footprint by 20% while increasing productivity, or allow you to add personnel in the same footprint you currently occupy. Used or refurbished product can significantly reduce your spend. Innovation in the workplace is always expanding and while saving money, you can also enhance the workplace environment. When you expand the CCO to include recruitment and retention costs you can hit a home run in this category.

Facility Management
If you are small, and use contract providers, an audit of their fees may be in order by someone active in the market. If you are large enough to have a full or partial facilities staff, you may want to look at out-sourcing that may save 10% to 20% of the overall expense. At a minimum, an audit of the FM operation and costs is in order by a qualified third party.

There are numerous components to your CCO and we have only scratched the surface on potential savings approaches . You should look broadly and dig into each one of these cost components to extract savings that will lower your cost of occupancy. This will allow you to repurpose those funds to more important activities that support your organizations long term goals.

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More Companies Consider the Advantages of Onshoring

Monday, September 17th, 2012

By Tim Myllykangas, Principal
and Mitch Jacoby, Principal

For decades, US-based businesses have gone overseas to locate operations in emerging countries with low-wage labor. Subsequently, many companies have found that wage margins between our country and foreign markets have tightened, markets have become saturated, and customer satisfaction levels have declined.  Recently, well-known companies such as Dell, Delta, US Airways, and United have brought operations back to the States.

Initially, multi-national companies determined that the offshoring of certain functions—especially in call centers, back-office operations, and business processing outscouring—made sense.  This was tied to an economic reality- the potential wage savings between the United States and many international markets was as high as 70%.  However, as more companies seek to compete on a global scale, these markets are becoming increasingly saturated.

Is Onshoring a Real Trend?  
Listed below are examples of the many companies that have chosen either to return operations home or focus on consolidations within the USA in smaller Tier II or III communities:

- In 2011, Delta stopped outsourcing to a South African firm.
- Also in 2011, US Airways closed its call center operation in Manila.
- Hewlett Packard consolidated business functions to Arkansas in 2009.
- IBM opened a technology center in Dubuque, Iowa in 2010.

The Hard, and Hidden, Benefits of Onshoring Wages.
While countries like China and India, with wages still below those in the USA, have experienced sharp rises in labor rates, wages here have barely kept up with inflation.  Unemployment and underemployment continue to put downward pressure on wages. This further reduces the wage advantage, with many skilled people willing to work for lower wages.

Homeshoring.  Homeshoring (remote employees working at home in the USA) can be 15% to 20% less expensive than offshoring, according to some studies, creating a scalable workforce and reducing operating expenses, including real estate.  Many large global US companies are now making a push to further increase the percentage of their home-shored workforce.

Smaller Cities.  Tier I US cities have frequently been used for wage comparisons to offshore locations.  However, today, an increasing number of entry- and mid-level jobs can be located in less expensive Tier II and Tier III cities.  Examples include IBM planning to hire up to 1,400 in Dubuque, Iowa, and up to 800 in Columbia, Missouri, and HP planning to hire up to 1,300 in Conway, Arkansas.  Locating in Tier II or Tier III US cities can provide meaningful labor, operational, and real estate savings in lieu of offshoring.  Also, incentive packages in some US communities outperform incentive packages in other countries.

Additional Costs.  Beyond labor, other costs that can be higher in offshore locations include additional training of new employees who are unfamiliar with US business practices and customer expectations, and, those hired as a result of increasing turnover levels.  Further, “Americana” training and accent-neutralization programs are required in places like India.

Instability.  In many offshore environments, the risk of political and social unrest is ever-present, with fears regarding illegal markets, crime, employee security, IT theft, and intellectual property.

Language.  Language issues have historically been a challenge in outsourcing to places like India, but to a lesser extent in the Phillipines.

Customer Satisfaction.  Resulting in part from language and cultural issues, agents often take significantly longer to resolve problems, and customer satisfaction scores decline due to their frustration.

Corporate Reputation.  Increasingly, companies are being challenged for supporting countries with poor human rights records and lax labor standards.

How Can Companies Decide Which Way to Go?
Given the stakes and the complexities involved in the onshoring versus offshoring debate, companies should:

- Evaluate corporate needs and understand the magnitude of potential labor savings. Ask yourself, do we really have an optimal workforce footprint? Are there better labor pools out there for our specific job descriptions?

- Learn from other companies that have gone through this process to hear first-hand about the value, savings and how to avoid expensive mistakes. While circumstances are never exactly the same, best practices will emerge.

- Perform periodic comprehensive comparisons of existing and prospective labor pools to identify optimal labor and operational savings that will help improve shareholder value.

- Compare Tier II and Tier III cities as part of your ongoing strategic workforce footprint optimization.

- Identify incentives and grants that are available for your specific project.

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End of the Year Thoughts Regarding Facilities Management

Thursday, December 15th, 2011

By Jim Ricker, Vice President, Corporate Services

With 2011 coming to a close, this is a good time to reflect on some key points about FM.

Facilities Management is not a commodity.

Some consultants who advise corporations and institutions about outsourcing tend to view FM as a commodity that can be purchased similarly to services such as custodial, grounds, office supplies, and the like.  This is a terrible concept and should be resisted by prospective acquirers of FM services.  You are entrusting the care of your real estate assets to professionals from a service organization.  The right decision hinges on much more than the fee per square foot and the generation of reams of reports.  You need a provider who is trustworthy, experienced, innovative, and works well under a performance based contract.  Think of this work as you would that performed by your accountants and attorneys—it is that important.

Outsourcing is not a universal panacea.

It works well for some organizations—those that don’t have the internal resources, have a history of outsourcing non-core work, have a culture that accepts the concept, and have an executive management team that is totally committed to the approach.  In addition, organizations that are having difficulty keeping pace with rapid growth may be candidates for outsourcing.

For those corporations and institutions that have strong internal groups, outsourcing often has no benefit and may be more expensive.  For an internal FM team that effectively manages costs, hires contractors for repetitive services such as custodial and grounds and infrequent, highly skilled services such as elevator maintenance and indoor air quality testing, keeps its team trained and skillful, and provides relevant information to senior management, outsourcing offers little.  In fact, there could be a regression if the culture is complex and skeptical of outsiders.

Learn the language of the customer and use it to communicate.

FM teams frequently work for another function—often Finance, Administration or Human Resources.  And FM’s key customers are usually senior managers of sales, service, engineering, or manufacturing.  These constituencies are typically not fluent in the language of FM.  They think in terms of their own functions:  time to market, inventory turns, employee turnover, employee productivity, earnings per share, occupancy as a % of sales, and the like.  Learn how they think about work, and adapt how you communicate to their way of thinking.  You will be much more effective and appreciated and may be viewed as more integral to the success of the company.  This is a critical concept for both internal FM teams and external, fee-based providers.

Look for more key points about FM on future blog posts.

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More Thoughts on FM Outsourcing

Wednesday, June 15th, 2011

By Jim Ricker, Vice President, Corporate Services

In last September’s blog post entitled “Is Outsourcing Facilities Management a Solution for my Business,” I wrote about the pros and cons of outsourcing this critical CRE function.  Based on a recent study I worked on for a major institution, this discussion is more relevant than ever. 

The study focused on a portfolio of 1,000,000 SF of space in multiple locations within a 50 mile radius.  At the onset of the study, Facilities Management (FM) was managed internally with some activities provided by third party vendors (commonly referred to as out-tasking as opposed to outsourcing).  In order to determine if this approach was cost-effective for the institution and supportive of the business units, the study considered costs, customer satisfaction, processes, and FM employee knowledge.  Given the size of the portfolio, this would logically be a mid-sized outsourcing opportunity that would attract several service providers.

As I mentioned in last September’s entry, to be successful, FM outsourcing depends upon several factors:

-Clearly stated goals that are achievable

-Client commitment from the executive offices

-Performance-based contracts with rewards and penalties

-Single points of contact for both client and service provider

-Constant communication – informal and formal

-Flexibility as scope of work and economic climate changes occur

-Technology applications that provide relevant information for decision-making

When this institution was considering outsourcing, it was clear that all of these factors could be met or already existed.  But there were also two other considerations that affected the institution’s decision:

-A unique culture within the client company that was extremely difficult to replicate; therefore it would  take a service provider several years to fit in and become productive; and,

-The need for reduced operating expenses by subcontracting high volume, low cost services such as custodial and low volume, and high cost services such as elevator maintenance.

And missing from the institution were the following actions:

-Reorganization to eliminate redundancy and poor performance

-Implementation of performance-based review system for employees

-Consolidation of services to take advantage of bulk purchasing

-Institution of a training program to maintain and enhance staff knowledge

While it might appear that the logical outcome would be for the institution to outsource its FM function, the study reached a different conclusion—recommending that the work continue to be performed internally provided that several changes were made.  One major reason given for this recommendation was the unique culture of the institution:  a culture that would make outsourcing a time-consuming, lengthy process involving significant management attention with disruption to several critical business operations. 

The other major reason for this somehat surprising recommendation was that senior management was willing to implement the changes necessary for a successful in-sourcing.  They were willing to eliminate senior positions that were redundant and added little value—and were sometimes even counter-productive.  The organization was therefore simplified with fewer layers and improved communications.  Performance-based reviews for employees were adopted, consolidated purchasing was improved, and training was increased. 

As a result of these changes, the institution realized savings (based on benchmarking) equal to or greater than what an outsourcing contract would yield, employee morale and performance increased, and customer satisfaction improved—all achieved with virtually no disruption.

Although outsourcing works well for many organizations, it is not always the best solution.  The decision is much more than a financial exercise and needs to account for the culture of an organization.

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Is Outsourcing Facilities Management a Solution for my Business?

Wednesday, September 29th, 2010

Jim Ricker color 2006By Jim Ricker

Outsourcing of various services has been around for decades—payroll, cafeteria operations, custodial, copy services, and guard services to name a few.  In the late 1980s, outsourcing of real estate was added to the list— Transaction Management, Project Management, Lease Administration, and Facilities Management. 

Entering its third decade, Facilities Management (FM) outsourcing has proven its value to corporations and institutions; often resulting in cost reductions of 10% or more, improved services, and better information for client decision-making.  Of course, there are also examples of failure when the clients’ expectations were not met, and contracts were thus canceled. 

So, is outsourcing the right solution for you and your firm?

To be successful, FM outsourcing depends upon several factors, with the absence of any one often leading to failure:

-  Client commitment from the executive offices

-  Clearly stated goals that are achievable

-  Performance-based contracts with rewards and penalties

-  Single points of contact for both client and service provider

-  Constant communication – informal and formal

-  Flexibility as scope of work and economic climate changes occur

-  Technology applications that provide relevant information for decision-making

Even assuming that you are confident that all of the above factors can be met, is a successful outsourcing of your FM services a foregone conclusion?  Not necessarily, if you have:

-  A unique culture that is extremely difficult to replicate and would thus take a service provider several years to fit in and become productive,

-  Successfully reduced operating expenses by subcontracting high volume, low cost services such as custodial and low volume, high cost services such as elevator maintenance,

-  Reorganized to eliminate redundancy and poor performance,

-  Implemented a performance-based review system for the employees,

-  Consolidated services to take advantage of bulk purchasing, and

-  Instituted a training program to maintain and enhance staff knowledge.

The decision to outsource is not a simple one.  It requires a commitment at all levels within the organization and a tolerance for the disruption caused by a transition to a service provider.  If your benchmarking efforts indicate that your costs are competitive, your customers are happy, and you have a well-trained, highly-motivated staff, then you might only outsource those services (custodial, elevators, pest control, etc.) that can be performed better and more cost-effectively by others.

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Real Estate as an “Infraservice”

Wednesday, March 3rd, 2010

vbangiaBy Vik Bangia

 

In the area of corporate real estate outsourcing, smart service provider firms understand that the purpose behind their engagement is more than just doing what they’ve been told.  To understand exactly what comprises a good outsourcing plan depends on the specific needs and challenges of the client’s organization, and that’s often difficult to discern.  In most cases, it follows naturally with the size of the company.  To get to that level of understanding, real estate has to be considered an infraservice by both the client and the service provider.  I define “infraservice” as a service that is key to the entire corporate infrastructure from Human Resources to IT, Operations, and Finance.

  

As a general rule, smaller organizations from mom-and-pop sized companies to burgeoning start-ups (nano-caps) to micro-cap firms are burdened with resource scarcity, limited cash flow, and survival issues. The outsourcing solutions to smaller firms are best delivered through the use of just-in-time and variable resources, financial portfolio optimization services, and a view towards freeing the company to focus on its core business. These firms can be from less than $50 million to $300 million in market capitalization.

 

Conversely, medium sized companies, such as those in the Russell 3000, are typically burdened by limited access to capital, recruiting and retention challenges, an overwhelmed infrastructure, unpredictable processes (due in part to their inherent entrepreneurial spirit), and the fact that real estate is not a core competency that has been built in to the organization.  These firms benefit from highly consultative partnership models that deliver tactical services along with financial management skills and business controls. Small and Mid Cap companies are defined as firms with market capitalization ranging from $300M to $2 billion and $2billion to $10 billion respectively.

 

Big companies, such as those in the Fortune 1000, (also defined as those with market caps above $10 billion and extending to the hundreds of billions) have entirely different issues. They are challenged by multiple business lines with varying levels of profitability (if they are profitable at all), underperforming assets, bureaucracies, long-term liabilities, and lack of speed or mobility. In addition to a strong consultative skill set, the service provider has to be willing to step into the fray of organizational politics and competing business unit agendas.  The challenge here is that most service providers working for Fortune 1000 companies are relegated to a commodity role because the bigger the organization gets in complexity, the more the purchasing or procurement department exerts its authority on decision making.  This lends itself to service models that are based on price and not performance.

 

Even more challenging for big corporations working in this mode is that there are fewer and fewer alternatives available to engage only one service provider. And service providers working in this mode cannot see real estate as an infraservice while they are engaged as a commodity.  A dilemma indeed, but one that bodes well for those firms that are nimble and can provide resources beyond those that think only transactionally.

 

No matter the size of the company, the real estate service provider’s role is to think like an infraservice provider and input the corporate requirements for HR, Operations, Finance, and IT into the strategic decision for the company.

 

Question yourself.  As a corporate real estate manager, does your real estate service provider team approach their role as an infraservice?  Have they understood your unique needs based upon the size of your organization?  Are they trying to go beyond the tactical day-to-day service delivery and get into all aspects of your business?  Do you consider them the “go to” team for questions ranging from leasing to organizational design to M&A due diligence?  Do they approach their role as a business consultant as well as a real estate expert? If the answer to any of these questions is no, consider the fact that your real estate service provider may have already put themselves in a commodity role.  If so, you’re not getting good value for your money (but you probably already knew that). Take this as an opportunity to bring in experts who can show you how rethinking the service provider relationship can enhance your relevance to your company’s senior management.

 

Bangia 3.3.10

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