Corporate Real Estate Outsourcing The Next Generation

This article describes the evolution of corporate real estate outsourcing and how leading corporations will drive the next generation of innovation and performance of the major service providers.

The Early Days Outsourcing of corporate real estate functions began in the early 1990s, when Trammell Crow, Koll and other developers turned to property management as an avenue to redeploy talented resources during the real estate depression that followed the S&L crisis. The service provider industry has grown steadily since then, accelerated by growing demand from corporations looking to reduce staff in non-core functions. And many corporate real estate departments have also matured, adding leaders from within their businesses that could speak the language of the C-suite.

But up until about 2005, most of our consulting clients had just one concern when selecting a new service provider: Can they deliver the services we need? This seems like a simple question, but there were two problems. Most service providers did not yet have the depth of resources and processes that the clients wanted. And to be fair, the clients definition of deliver the services kept expanding. In those days, service delivery was defined as: 1. Coverage- Facility, project, and transaction management expertise and staff in all major geographic markets, and lease administration and finance from a central location 2. Market Knowledge -In depth knowledge of transactions and players in each market, and free market intelligence to keep us ahead of the game 3. Organization -A delivery model and organization structure that met service level requirements and saved costs 4. Operations -A help desk to handle facility work orders and ability to use technology to support operations 5. Management Support -Business savvy account leaders who "could see the big picture", recognize issues on the account and get support from service provider executives and subject matter experts when required. As consultants assisting corporate clients through RFP processes since 1995, we have heard most every service providers sales pitch many times. By 2005, virtually all the major providers could meet client requirements for service delivery, albeit with some holes in geographic coverage and technology

platforms. And they all got better at presenting their stories, both in written RFP responses and oral presentations. This made it increasingly difficult for clients to differentiate among the providers, and resulted in many firms getting some work rather than a few firms winning out. Clients believed that most of the providers were capable, but none were outstanding, so they should divide up the work by function or region. Selections were often based more on cultural fit and qualitative assessments than on rigorous RFP evaluation scorecards or projected cost savings. And few companies were willing to bet the farm on a sole-sourced outsourcing solution. The Growth Spurt As we started the second half of this decade, three things happened that pushed outsourcing decisions to a higher level. First, clients under the gun to expand globally, move faster and cut costs kept pressuring the service providers to improve in all aspects of delivery, and of course lower their costs! Secondly, Sourcing groups in the larger companies joined the outsourcing process, demanding more transparency in pricing, detailed service level agreements and fees tied to performance against budgets and other key indicators. Thirdly, the service providers with transaction management segments got a windfall from the booming investment sales market, allowing them to invest in infrastructure to support their corporate services business. These investments in standardized processes, web-based technology and subject matter experts to meet every need allowed some firms to move ahead of the pack. Although promises of benchmarking and best practices were not always achieved, these providers still set a new bar for their competitors to meet. Outsourcing RFPs soon assumed all the criteria for service delivery would be met in full, and asked bidders to articulate in detail their capabilities in five new areas: 1. Standard Processes- Offer standard playbooks for each function that can be easily modified to fit client processes, and staff that is well versed in the standards 2. Integrated Technology Provide software applications (home grown or third party) that are user-friendly, integrated and accessible on-line 3. Performance Reporting Provide timely and accurate auto-generated and ad hoc reports with easy-to-understand metrics and points of accountability 4. Adapts to Client Culture - Understand our business, objectives and industry, and bring an effective teaming approach to keep pace with our changing needs 5. Rational Pricing Model -Offer competitive pricing, share a portion of commissions in rebates, and put fees at risk against KPIs Today, all of the major service providers had made strides in addressing the issues above. Everyone understands the requirements, and everyone has an answer. Perhaps the biggest differentiator is technology, although so far no provider has that completely figured out. Some present a home grown system, some pick best in class applications off the shelf, and some say they can integrate any data you need and present it real time in an executive dashboard. Each approach has its advantages, but we will have to wait and see if any firm can take it to the next level of competitive advantage. The criteria above have also changed the way RFP processes are run. The old RFI/RFP/pick one and cut a deal approach is fading in popularity. Some consultants and internal sourcing managers prefer a quantitative approach, where bidders price every possible service and transaction on a unit basis, with harsh penalties built into the contract for non-performance. We prefer to narrow the field to a short list of

serious candidates, and then spend extra time in interactive sessions where the client team can get to know the bidders and evolve to a better understanding of the solution they will get and the risks that go with it. We focus on pricing issues through a best and final offer process once the solution has been finalized. This approach helps to start the relationship off with a partnering philosophy and bodes better for continuous improvement over the life of the contract. The Next Generation The CBRE-TCC mega merger and the marriage of JLL and Staubach have solidified those firms leadership positions in global, full service outsourcing. Cushman & Wakefield has shored up its capital position and hired new leaders for CRE services to stay in the hunt. Facilities powerhouse JCI acquired USI, and UGL from Australia acquired Equis and Unicco to create full service platforms. And Grubb & Ellis, CRESA, Newmark, Colliers, NAI and others continue to grow their platforms. By 2010, we expect to see a new generation of corporate requirements reshaping the competitive landscape. The predictions below are based on some recent work with clients who have already been outsourced for 5-10 years. We believe that they will push the leading service providers to add value beyond the ten criteria discussed above. Their expectations could include: 1. Program management- Deliver services seamlessly on a program basis to save clients time and money, with personnel, processes and systems aligned accordingly 2. Relationship Management Provide organizational design, customer interface, governance, and technical training and development for client and provider staff 3. Strategy and Innovation Take a lead role in strategic planning, business process reengineering, and technology exploitation, and brings new ideas and approaches to client that significantly improve the position of CRE within the company 4. Partnering Commitment Show on-going commitment from executive champions from
service provider to partner with client on issues including staff retention, succession planning, best practices and SOX compliance

5. Risk Transfer - Increase commitment on insurable events, hold all service contracts on service provider paper own name, and drive improvements in sourcing and vendor management. We have seen innovation recently on large scale, integrated outsourcing proposals, including the embedded strategist model, predictive market models to drive leasing decisions and executive review sessions to keep communications open and relationships strong. We believe that as the industry evolves, these types of programs will be the norm rather than the exception. The market is likely to stay hot for a while, but the demands on service providers will also continue to increase. The winners will be the firms that continue to invest in their platforms during these tough economic times, in personnel development, standard processes and technology that turns data into actionable information.

Service Provider Requirements

Next Generation: Program management, relationship management, strategy and innovation, partnering commitment and risk transfer

Growth Spurt: Standard processes, integrated technology, performance reporting, adopts to client culture, rational pricing model

Early Days: Coverage, market knowledge, organization, operations and management support