How to Hire Green Vendors, Part I
September 8th, 2011
By Mike Tobin, Director of Sustainability
So you have decided to implement sustainable real estate strategies within your organization. Congratulations are in order as that means you have gone through a strategic planning process that included a focus on sustainability and its relation to the built environment. Now comes the hard part of implementation. How do you find vendors that know how to help implement your carefully crafted strategy?
First and foremost it is important to recognize that there are MANY different types of vendors that claim to support sustainable
practices—a number which has grown exponentially in the last five years. So whereas before there were one or two choices for vendors providing a specific sustainability service, there are probably ten times that amount today. In addition, they each say roughly the same thing but in a slightly nuanced way so that they all seem to blend together. I like to think of it in the same was as assessing how to select an air conditioner repair vendor. There are hundreds to choose from and some can repair all systems, some can only work on major brands, some on only one brand, some also sell new systems, some sell components, some are licensed, etc. At this point, before you just give in and go with the first one that appears on a Google search, stop and recognize that a simple search will not suffice. You will need to set up a selection process.
The next step is to establish this selection process. Again this is no different than any other vendor selection process, but now, because you recognized how complex the sustainable vendor field has become, you must think of this as a more complex vendor selection. The first thing you must do is clearly define your objectives and requirements for hiring the vendor. This will help your organization think through the details of the implementing the strategic goals before you let a vendor enter into the conversation and potentially steer you one way or another. Now you may talk to a few different vendors to better understand the tactical options available in the market—this is not a selection interview, just an informational interview. The amount of time and effort you put into this step—tackling your internal issues first before you expose them to the vendor community—will pay off handsomely down the road.
In Part II, I will discuss the remaining steps in choosing vendors to implement sustainable real estate strategies: developing your criteria for the selection process, developing a list of potential vendors, and sending and processing RFPs. I will particularly concentrate on the criteria I think you should focus on in your selection process.
Tags: corporate real estate, green, vendor, vendor selection
Posted in Sustainability | Comments Off
Engineering Value, Not Value Engineering
August 31st, 2011
By Phillip Infelise, Chairman
In this edition I want to explore the difference between Engineering Value and Value Engineering, or specific ways that the New Day Project Manager can bring value to the project and put dollars back in the client’s pockets.
Any client that has been around projects long enough understands the term Value Engineering. And, frankly, shudders when they hear it. In the vast majority of projects, value engineering is a reactive position. It usually means the following:
-We have listened carefully and incorporated everything you wanted into the design of your project.
-We forgot to mention that some things you asked for (and we agreed to include in your design) you simply can’t afford in the context of the budget we (the whole team presumably) agreed upon.
-Now we have to show you the ways we will take thing that you really want (and maybe even really need) out of the project so that we can all say we delivered it “on budget.”
-In most case this means you get something close to what you wanted, but not quite. It may perform at a level lower, but hey, it costs a little less, right? Wrong!
In other words, Value Engineering is rarely a good thing—it means we are taking something from you that we promised we could provide. (The “We” means everyone on the Project Team that should know better; the client isn’t expected to know unless they have been told in advance).
In a proactive world where we hope most New Day Project Managers live (at least I know the CresaPartners ones do), it is appropriate to reverse the process and begin Engineering Value from the outset of the project. Engineering Value is a proactive approach wherein the Project Manager encourages the Project Team to always explore more cost-effective solutions wherever they may be, whether or not the client can “afford it”—since many times the same aesthetic and performance can be achieved at a much lower price point. It should be our everyday mission to always find a value-creating solution, no matter how big or small the client (or their pocket books). To do so requires that the Project Manager has a very strong grasp of what everything (absolutely everything) on a project costs and the experience to draw solutions from a variety of projects and source.
There are a deep and wide variety of opportunities to Engineer Value and here are just a few of them an experienced Project Manager will offer:
-Set the right budget (not just a too tight budget) in the first place and do the client the favor of avoiding Value Engineering entirely. Dig deep to make sure all of their needs are covered in the budget and help them envision items they may not anticipate themselves.
-Save square footage and save huge dollars. Understanding their business needs, creating appropriate but tight requirements, and producing efficient space programming creates a value home run that will mitigate the need for the bad value engineering phase.
-Right Size everything—offices, workstations, file rooms, take periodic storage offsite, etc. Again, economizing on square footage creates the biggest value right up front and can create an enhanced workplace.
-Hire the right project team that wants to partner on value creation and is not paid on a percentage of costs, which creates a potential disincentive to engineering value as a team.
-Force the design team to attach a specific dollar amount to every design solution that they offer so that the client understands the price of what they are falling in love with.
-Question any procurement where the client suggests they have “great national purchasing agreements.” There is so much exposure here that we often offer to work for just the savings on that specific item, as value gaps on big ticket items like furniture can cover our PM fees many time over.
-Explore “pre-owned” furniture in this aggressive market so long as you understand the full costs involved—but be prepared to buy all new as manufacturers have adjusted pricing to compete head to head against that market.
-Specify carpet face weight based on the years the client will be in the space—use lower carpet face weight for a seven year term, higher for a ten, and highest for a twelve. Face Weight = Cost. Don’t pay for value you will never be able to access.
-Purge. Force the client to energize a serious purge campaign so that they are not paying to relocate stuff they will never use.
Note that none of these suggestions sacrifice quality or performance; they simply suggest alternatives that cost less money. That’s Engineering Value. That’s what we do.
If you are following this blogger, you know we have followed an evolving pattern of subjects since day one. For the next edition in a few months, I am ready to take suggestions. Let me know what you want to hear about in this wonderful world of the New Day Project Management approach.
Tags: corporate real estate, cost savings, engineering value, PM, project manager, value engineering
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Supply Chain and the Triple Bottom Line
August 24th, 2011
By Rob Wheeler, Vice President
Sustainability continues to be an important issue to corporations. Eighty-one percent of Fortune 500 companies now have some type of corporate responsibility report or CR statement on their website. In the last four decades we have moved from energy audits, to environmental audits, to sustainability assessments. These various audits and assessments have now evolved into what is being termed the “Triple Bottom Line.”
The triple bottom line involves thinking not just of corporate profit but also along three pillars of responsibility. Along with economic concerns, a company should also consider the ecological and societal impact of their decisions.
Quantifiable environmental impacts include water utilization, consumption of finite resources, energy use, and pollution emitted. Societal issues include the health and safety of the employees and visitors, diversity, education, and community involvement.
What does this have to do with supply chain? A lot, actually. The supply chain can have a very big impact on the triple bottom line. Through an effective corporate sustainability assessment of the chain, decisions can be made to improve the organization in all three aspects of the Triple Bottom Line.
Most people think of sustainability in environmental terms. Think about the various decisions that can be made in the supply chain to affect the environmental impact of the organization. While a network optimization may be geared at lowering overall transportation cost, it might also reduce overall resources and energy utilized. Fewer miles driven means fewer gallons of diesel fuel burned. There could also be a greater emphasis on intermodal transportation to lessen the use of fossil fuels. What about the real estate? Is there a way to incorporate alternative energy methods such as solar energy into a warehouse? All of these considerations typically help the monetary bottom line, but they also help the bottom line of the planet.
The people side of the Triple Bottom Line is a little more interesting. To sustain a business it pays to keep quality employees happy and healthy. It has been proven time and again that maintaining this positive work environment will lead to greater profits in the long term. What does this have to do with industrial real estate? There are ways in which choosing an industrial facility impacts the workforce. Does the warehouse let in natural light? It is truly convenient for the disabled? These are factors to consider, and they may lead to unexpected productivity gains.
Corporate responsibility and measuring the Triple Bottom Line can also lead to gains on the top line of the income statement as well. Large organizations, especially large retailers, have begun to include various social responsibility measures into their criteria for measuring vendors. Better shelf space, and possibly better business terms, could be awarded for doing what is right. This should be a definite incentive to ramp up corporate sustainability measurements.
From an initial supply chain assessment, to a full organizational sustainability plan, the Industrial/Supply Chain team at CresaPartners can help your organization toward success in all three pillars of the Triple Bottom Line. Let us know how
we can help.
Tags: corporate real estate, corporate responsibility, industrial, sustainability, triple bottom line
Posted in Supply Chain | Comments Off
Workforce & Location Planning: The First Step in the Real Estate Process
August 3rd, 2011
By Tim Myllykangas, Principal
Founder, Workforce & Location Planning
Earlier this year, when I was speaking at the CFO Rising conference, I asked those attending my session if they knew how Workforce & Location Planning (W&LP) could help them with their corporate location planning. More than 90% indicated they had never used a workforce planning consultant. But by the end of the session, many said they could definitely benefit from this service and wanted to learn more.
Indeed, it is important for C-Suite executives to be familiar with this offering as part of an integrated package of corporate real estate services. Accordingly, I thought this would be a good time to address what W&LP is all about and how it can meet your needs.
The Process
In a nutshell, W&LP is primarily about business and workforce strategy, not just real estate strategy.
Often, companies first examine their current portfolio and try to work within those parameters. This is a function of Real Estate Portfolio Strategic Planning, which is actually step 2 in a typical portfolio optimization process.
In a typical portfolio or multi-city project, W&LP is the first step in the process since it starts with a clean-slate perspective—i.e., it looks at the broader picture beyond the current real estate portfolio. Addressing what the C-Suite is typically most interested in upfront, it focuses on finding ideal corporate locations based on workforce recruitment, retention, labor market sector saturation, competition, turnover, and salary levels. In other words, W&LP is ensuring that the most valuable asset and largest expense—people—is driving the location decisions for existing and new locations. The goal is to create an optimized workforce footprint, whether that involves existing locations or not.
In addition to workforce, other non-real estate location factors we research, analyze, and compare include: power costs, power reliability, natural disaster risk assessment, and incentives.
The Pitfalls
Some companies think they can short-circuit the process by working with brokers or consultants who don’t specialize in W&LP. For example, they will pull labor costs from a web site and plug that into a cost-line analysis. This is a dangerous approach for several reasons:
-Companies need to take a “deep dive” into competition levels, recruitment, retention, turnover, etc. A slightly lower-wage city might actually have higher turnover, making total labor costs higher when re-training and recruitment costs are considered, or a lower-cost community may have an insufficient amount of labor.
-Our research has found that in many cities there is an inverse relationship between unemployment rates and workforce supply. In some cities, the higher the unemployment rate, the lower the available workforce, often due to a lower work ethic. In some cities with lower unemployment rates, there can be more available workforce. This is due to higher levels of under-employment, a factor that is far more indicative of the ability to recruit and retain than unemployment.
-Companies need to work with experts who can interpret the data collected from multiple sources and understand its limitations, where and how data is often over-averaged, especially if the source is a free web site. Without the benefit of more comprehensive, “real data,” companies often ill-advisedly eliminate cities that might potentially be great candidates, or they might keep poor choices on the short-list that should be eliminated.
The added value lies in analyzing and interpreting the data from many sources, then turning that into strategic, actionable recommendations.
Tags: corporate real estate, cost savings, location planning, Site Selection, unemployment
Posted in Workforce & Location Planning | Comments Off
Valuations Still Uneven, Vary by Product Type
July 27th, 2011
By Jim Leslie, Principal
Valuations of commercial real estate product continue to vary by product type. Primarily due to the housing crash and the continued fallout of the mortgage debacle, most multifamily rental communities are showing signs of stability as well as rent increases. The industry is welcoming back individuals who had become home owners with the relaxed mortgage underwriting but now find themselves renting again. The experiment of making everyone a homeowner has shown to be unsustainable, recharging demand for apartments. Investors are rushing to purchase this product type at very competitive cap rates as they feel rent will continue to increase in the foreseeable future.
Office product has not been embraced by these same capital sources, and it is still difficult to find money (debt or equity) to fund new construction. Other than 100% fully leased build-to-suit opportunities, very little new construction is occurring in most areas of the country. In addition, landlords are still working to modify their capital stack to reduce leverage and extend terms. As a result, many landlords are finding liquidity to be a challenge and that is creating problems for them in negotiating renewals as well as limiting their ability to close new leases. Tenants should be looking at their current portfolio of leased properties to identify those landlords with liquidity issues and approach the landlord now to probe options which will be beneficial to the tenant and may also be helpful to the landlord. For example, a recent transaction allowed for the tenant to pay for tenant improvements in exchange for a reduction in rent, giving the tenant a 15% annual return on the capital it invested in the improvements. That is a 10 year investment return of 15% compared to a 10 year treasury rate of 3%. How many Chief Financial Officers would love to get a 15% return on their own operations and not worry about the investment? These kinds of returns are more the norm than the exception and can have a meaningful impact on the stated rent in the lease agreement. It also allows the tenant to effectively gain long-term occupancy at below market rates regardless of who eventually owns the building. Other opportunities exist for tenants to purchase the buildings they occupy at below replacement cost values. They will eventually be able to take the building back to market in a sale leaseback transaction utilizing the credit of their balance sheet to maximize value. We are seeing some developers beginning to sell some of their owned portfolio to free up liquidity for their remaining assets. They recognize this is not a strategy that maximizes value, but they are going through a unique time and are looking to keep what they can. It seems all of them are repeating the mantra: “it is what it is.” This is an ideal time for a tenant to approach their landlord to see if a transaction can be accomplished. There is no harm in pursuing those assets which you feel are quality and strategic to your core business.
This opportunity will exist throughout 2011 but it is beginning to appear that all “troubled” real estate investment portfolios will be either recapitalized or sold by 2012, creating a much more stable and patient landlord for the future. Now is the time for tenants to aggressively review their own portfolio to see if opportunities exist within their markets.
Tags: corporate real estate, landlord, tenant, valuations
Posted in Capital Markets | Comments Off
Modest Job Growth Helps Recovery in Select Markets
July 20th, 2011
By Bill Goade, CEO
In mid-2010, economists declared that the recession was over, and the recent unemployment rate of 9.5% seems to confirm modest job recovery. But as Q2 2011 comes to a close, the recovery has not picked up any momentum and in fact seems to have slowed. The few markets that showed recovery in Q1 (Silicon Valley, the Bay Area, Cambridge, Mass., and high-rise midtown New York) continued to show strength. However, in most office markets, job growth has remained modest, and demand has been relatively flat. It will probably be another year before national vacancy begins to fall significantly and average rental rents rise. A full market recovery will probably not occur until 2013, when we likely will reach pre-recession employment levels, and that will occur only if the job growth picks up. For the most part, there is little velocity for class B space, and suburban areas are generally suffering more than CBDs.
The national availability rate of 17.3% is slightly down from Q3 2010, the high point since 1993. Meanwhile, average rents are still well below the highs by more than 25% in 2008 in most markets.
In most places it remains a tenant’s market and an especially good time for credit-worthy tenants to exercise their leverage in negotiations with landlords. While some landlords are becoming more bullish, most are focusing on tenant retention at almost all costs as demand remains sluggish in markets nationwide.
Along with modest job growth is the phenomenon of unused “shadow space.” Companies will backfill that space as they hire rather than expand. At the same time, over 70% of transactions continue to be renewals rather than relocations.
Bright Signs
Positive indicators include the following: The amount of occupied space increased slightly for the third straight quarter, and average office rents also rose slightly, their first spike since Q2 2008. In addition, investment activity rallied last year, recording $168 billion in sales, up 60% from 2009.
Opportunities for Tenants
The window is still open for tenants in most markets, and we continue to encourage companies to be proactive in negotiations before their leverage begins to slip. In some instances, one- or two-year extensions are available as landlords anticipate a better market in 2013 and beyond. Because of the likely tightening in availability, we rarely recommend the short-term extension strategy at this time, unless the business plan simply cannot support a longer commitment. However, tenants need to weigh flexibility versus likely rent hikes in two or three years. In other instances, tenants, especially those with strong business plans, have an opportunity to lock into leases of eight years or more. Finally, given low interest rates and impending changes in lease accounting, this may be an excellent time for some tenants to buy real estate.
Click here to read about your local market.
Tags: corporate real estate, job growth, landlord, recession, tenant, unemployment
Posted in Tenant's Guides | Comments Off
Tenants Firmly in the Driver’s Seat
July 7th, 2011
By Terry Quinn, Principal
As is often the case, there seems to be a public air of optimism, but behind the scenes, most participants acknowledge a continued lack of certainty and visibility related to the overall economy and the commercial real estate markets. This uncertainty is largely driven by the market manipulation of the Fed in terms of QE2 (scheduled to end this summer), negative real interest rates, weak overall recovery, and commodity inflation as a result of the overheated dollar printing press.
Dallas-Fort Worth (DFW) has certainly outpaced most other major markets throughout the country in terms of job creation. As such, it seems that many CRE players are lined up to prepare for the next upward part of the cycle. In the context of the office market, we think it’s a bit early for most landlords and investors to assume that the risks of loss of valuation are in the past. It’s only the sixth inning, and therefore, despite the fact that the Fed has been successful in rebuilding bank balance sheets thereby allowing a delay for many owners facing refinancing, troubled waters potentially remain on the horizon.
The $64 billion dollar question is what happens if interest rates move significantly upward over the next 18-24 months. We recently asked the COO of a major bank here in town about his thoughts regarding the future of interest rates. His response: “The window is between 6 and 18 months, but when the upward movement begins, we think it will move higher and much more swiftly than most expect. The 10 year could easily hit 6% or go higher.”
We recently reviewed the $3.9B of CMBS mortgage loans currently outstanding in the DFW metroplex. 38% of the total CMBS loans in DFW are on the watchlist. This ranks Dallas 3rd behind only San Diego and Riverside/Ontario in terms of the highest percentage of loans on the watchlist. In addition, 84% or $3.3B of the CMBS mortgages mature over the next 60 months.
We also looked at the 4 largest CMBS office loans in DFW scheduled to mature in 2012 (approximately $250MM in aggregate). We then stress tested these loans considering the current net operating income (NOI) and mortgage principal balance. We then applied current underwriting standards and current loan pricing/spreads against a 10 year treasury at 6%. On this basis, only 1 of those properties would have a Debt Coverage Ratio in excess of 1.0 and none would have adequate cash flow to be refinanced without re-capitalization through new equity.
We are not pessimists but realists. Other than a few exceptions, we see the uncertainty and weak economic growth placing tenants firmly in the driver seat. Landlords will continue to aggressively pursue renewals and new tenants to firm up and secure NOI now in order to achieve a refinance or sale before the interest rates move upward to reflect the real inflation pressures in the pipeline.
Tags: corporate real estate, Dallas-Fort Worth, landlord, tenant
Posted in Transaction Management | Comments Off
The Dreaded Change Order and Other Definitions for the CO
June 29th, 2011
By Phillip Infelise, Chairman
Of the many topics we have covered in the last dozen editions of this blogger’s posts, this may be the most delicate to address because the root of all Change Orders may not be in the evil hands that many (most) clients think they are. Frankly, most assume that general contractors make more money on change orders and are therefore always on the lookout to find omissions in the construction documents so that changes can be justified. However, I suggest that the real culprits may be lurking in the wasteland between communication and indecision.
Full disclosure is required as there are a few prejudices at work here:
-I used to ply my trade as a general contractor doing both residential and commercial work under the moniker Planned Aesthetics, Inc.
-I then considered Change Orders a monumental pain, as I do now.
-We work with great general contractors on both build-to-suit and tenant improvement projects—I would trust these general contractors with my client’s dollars as if there were my own, and they hate Change Orders as much as all the rest of us, clients included.
-We typically work in a pre-negotiated environment on a partnership basis with the general contractors and not in a hard bid environment where Change Orders are much more common. This partnering relationship—including a committed cost-sensitive design team—mitigates the typical Change Order atmosphere.
Let’s redefine the Change Order—casting the CO in a different light may dim the conventional wisdom a bit. We call them Cash Opportunities when we discuss them with the client, emphasizing that agreeing on where client cash is most appropriately spent up front will avoid the need to spend extra cash later on in the project. If we don’t do that well, we then move to the next definition.
Or, the CO can become a Client Obstruction. If we miss our chances up front, then COs can become major obstructions to the client achieving their objectives on quality and cost as well as staying on schedule.
Why schedule you ask? Because they are also Contractor Obstructions, meaning obstructions to contractors’ success. Those who believe that contractors must love Change Orders have never tried to sequence a construction project in such a manner that the contractors and their subcontractors both perform well against the schedule, build at a high quality level, and make a reasonable profit for their efforts. Change Orders do nothing but destroy that sequence and any additional fees on those COs will never compensate for that loss.
The CO can also be a Communication Omission. This is a more typical scenario where the client (or at least someone on the client team) decides after the fact to include something that was never contemplated during the needs analysis phase. Rarely would I blame the client for that; in a high communication mode, it would be our responsibility to draw that information out, and we try our best to do so.
Communication does work—everyone should try it sometime. As a historical perspective, I once tracked the last 15 build-to-suits that I have managed, both in the Washington DC area and from Denver westward. In those projects with a total value far in excess of $150M, the total change order exposure was less than 2% and more than half of those were directly owner-generated. I attribute that performance to two major approaches: (1) extensive work up front with owner/clients to detail needs and wants and (2) involving the design and construction team right from the outset so that all partners share in the mission of cost control.
As in everything around projects, clear communication and a deep-dive into early needs assessment is the key to avoiding Change Orders. Follow these simple rules to avoid Change Orders:
-Work clients through a needs, wants, and spend discussion in excruciating detail as time spent doing so saves money and time later.
-Let the client know what everything they mention might cost at the end of the day and have them agree to that level of spend—if you don’t know the numbers, find someone who does.
-Engage your design and construction partners in this discussion from day one so that they join you in a shared mission to minimize, if not eliminate, Change Orders.
-Never allow your designer to suggest a design solution to the client unless they specifically describe its cost and whether or not it falls within or outside of our known allowances.
-Take charge of the project budget that you are charged with controlling—don’t even let the client suggest additional spending if there isn’t a line item to cover it. Make them wrestle you to make changes, and they will thank you for it later.
Tags: change order, corporate real estate, general contractor, PM
Posted in Project Management | 1 Comment »
Foreign Trade Zones
June 22nd, 2011
By Rob Wheeler, Vice President
If you have been around the world of industrial real estate and supply chain management long enough, you have come across the term Foreign Trade Zone or FTZ. We hear the term often, but at the same time there are questions about what it is, how it works, and what savings can be achieved through the use of a FTZ.
Foreign Trade Zones are areas in the United States that are in or adjacent to U.S. Ports of Entry and are under the supervision of the U.S. Customs Service. These areas allow companies to operate as though they are outside the United States. Merchandise can be brought into the zone and held without being subject to normal Customs Duties and Taxes. If manufacturing occurs in a FTZ, the duties and taxes are applied to the product as though U.S. based added value (think domestic materials, labor, overhead, profit) never happened. In other words, the manufactured product is treated as though it’s just the parts, not the sum of the parts that has been assembled.
Although overseen by the U.S. Customs Service, a Foreign Trade Zone is actually a local community development. FTZs are typically an offshoot of an economic development corporation (EDC) or port authority that is trying to use the FTZ status to attract industrial development. Corporations going through the industrial site selection process may see Foreign Trade Zone status as a “must have” if they import a large quantity of goods.
In most cases, to obtain the FTZ perks a company has to locate to a General Purpose Zone. This zone is typically land owned and developed by a port or economic development entity, or possibly an institutional development group that has partnered with the local EDC. In some cases an organization might have enough business that a subzone is created just for that building.
An FTZ is a hot destination because of the savings it offers to the tenant. Not only are there elimination of duties and taxes, but being in an FTZ also allows a company to file for entries on a Weekly Entry basis, not a per shipment charge, resulting in significant savings. With the maximum dollar amount for entry on a per shipment basis being $485 for shipments valued at $230,952 and higher, a little math shows the dramatic impact of a Foreign Trade Zone.
EXAMPLE: 15 shipments per week, each with a value of over $230,952, would amount to a merchandise processing fee of $7,275 ($485 x 15) per week. If this number is annualized the amount is $378,300 (52 x $7,275) per year.
Companies in a Foreign-Trade Zone may take advantage of the Weekly Entry procedure. In the case of the above example, Weekly Entry would provide for one Entry per week. For example: the 15 ($230,952) shipments per week would be filed as a single shipment of $3,464,280 each week. The merchandise processing fee would amount to the maximum of $485 total for the week. If this fee is annualized utilizing Weekly Entry it is a total of only $25,220 yearly. In this example Weekly Entry provides a savings of $353,080 per year. The savings can be more or less depending on the number of shipments received during the year.
As you can see being in a Foreign Trade Zone can have a significant impact on budget of the supply chain department. There are potentially significant savings to be had. Is locating in a Foreign Trade Zone right for you? The Industrial / Supply Chain team at CresaPartners has the experience to help your organization walk through the decision making process.
Tags: corporate real estate, cost savings, Foreign Trade Zone, FTZ, industrial, tenant
Posted in Supply Chain | Comments Off
More Thoughts on FM Outsourcing
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.
Tags: corporate real estate, cost savings, FM, real estate outsourcing
Posted in Facilities Management | Comments Off
