Imagine that over the past decade you have accumulated a portfolio of 175 properties nationwide from multiple sources. You tally 57 suppliers for HVAC equipment, 135 for waste management and 133 for landscape maintenance. That's in addition to numerous one-off service arrangements and thousands of unmonitored purchases among the various properties. But operations are running pretty well, and it's not exactly keeping you up at night.
Now imagine you learn $8 million is being unnecessarily funneled away from your company each year. Suddenly, you might not rest easily.
Unfortunately, this scenario rings true for most REITS and commercial property owners, resulting each year in millions of unnecessary expenses. The growth of real estate portfolios triggered many inefficiencies that are now apparent in a down economy. Despite greater scrutiny of spending, many real estate executives remain unaware of the high price of wasteful procurement operations.
The Hidden Value
Many large property owners are seeking ways to manage spending. Specifically within the REIT industry, a new trend is emerging — Procurement Business Process Outsourcing, or BPO.
This process involves the evaluation and management of all areas of spending, which can yield tremendous savings. As commercial real estate firms continue to expand and be viewed alongside traditional equity investments, expense management will become more crucial. Real estate companies present a model with vast potential for savings.
Every sector of real estate has numerous opportunities for savings, such as the material savings related to construction and redevelopment efforts. Establishing Procurement BPO can be a valuable business proposition as real estate companies face greater performance expectations.
A BPO agreement begins with a thorough analysis of expenditures, providing a snapshot of product purchases, process inefficiencies and the company's supplier base. This inevitably presents a startling picture of underutilized contracts, too many suppliers and lost opportunities to leverage buying power.
A BPO provider analyzes a company's total expenses, from light bulbs to landscaping. The analysis may reveal, for instance, that 57 HVAC equipment supplier contracts could be reduced to just two or three, saving hundreds of thousands of dollars in that category alone.
A BPO team is the conduit to delivering savings. It negotiates local, regional and national deals, considering quality, delivery and service issues, as well as unit costs.
Sustaining Savings
The reduction in the number of service contracts can lead to huge savings, but the delivery of those savings over time is also a key responsibility. This sets BPO apart from a traditional stand-alone consulting engagement. Real estate companies that sign a contract with a procurement provider should evaluate that company's ability to manage supplier and internal compliance performance. Without ongoing programs of agreement management, the savings negotiated in the new contracts will never be realized.
On average, negotiated savings established by strategic consulting engagements begin to diminish in value by the end of the first fiscal year — leveling off completely by the third fiscal year, largely due to a lack of strong contract management.
Companies increasingly are recognizing the key functions of sourcing — procurement execution, logistics operations and management — must be integrated to prevent gaps and enhance efficiencies. The strategy of having one service provider ensures greater long-term sustainability.
The framework established in a BPO engagement enables companies to inject discipline into every spending category. Forming cross-functional teams that include employees of the company and the BPO provider combines the power of intimate company knowledge with procurement expertise to create a foundation for cost savings. This relationship also maintains the company's control and visibility over procurement activities.
Financial and operational expectations must be established at the start of the relationship. A governance council consisting of client and BPO staff should meet regularly to identify needs and priorities to provide guidance on how to reduce the number of suppliers.
In the end, a BPO provider can put money back in your pocket so you have more time to focus on tenants.
Larry Hall is president and CEO of Atlanta-based FacilityPro, a total procurement solutions provider.