Originally a product of the early-1990s wave of restructuring/downsizing that continues to this day, outsourcing has become an accepted feature of doing business by Corporate America. As companies across the nation seek to enhance their competitive positions in an increasingly global marketplace, they are (by and large) finding that they can cut costs and maintain quality by relying more on outside service providers for activities viewed as ancillary to their core businesses.
"Outsourcing is a fact of life for every single corporate function, be it finance, human resources -- or real estate," says Joel Parker, director of Research for the Norcross, Georgia-based Industrial Development Research Council (IDRC). "It is absolutely an established part of the way business is done today."
The move to outsource had its roots in the much-publicized moves by major corporations to reduce headcount earlier in this decade. This downsizing is still going on, although you don't hear as much about it these days, says Parker. "You don't read about as many 10,000 to 20,000 person downsizings, but it is still happening," he notes.
Many companies, finding themselves overstaffed, are trying to pare down the personnel numbers devoted to some activities, "and corporate real estate is one of them," says Parker. In today's ultracompetitive economic environment, "if the company feels it can do without a person or persons, it does so. It has nothing to do with corporate real estate per se -- it has to do with the corporate culture of the business world now."
"Today, outsourcing relationships have evolved from one-dimensional contracts based on cost savings to multidimensional partnerships that support the core business of client corporations," says Bill Concannon, CEO of Dallas-based Trammell Crow Corporate Services (TCCS). "The trend is for outsourcing relationships to function more and more as partnerships. Outsourcing providers are taking increasing responsibility in realms that have traditionally remained in-house such as corporate strategy, information management, business investment and internal quality initiatives."
TCCS's relationship with Xerox Business Services is an example of this new type of outsourcing relationship, says Concannon. The partnership between the two companies uses combined resources to increase revenue to both firms. "This alliance began as solely a facilities management assignment but is now a strategic partnership."
There are very few disadvantages to outsourcing, according to Raymond E. Bayley, managing director for Stein & Co., Chicago, a management group that is now participating in more than 20 strategic alliances or preferred provider relationships with companies like AT&T, Ameritech Corp. and Federal Express Corp. There are few problems, he says, "when knowledgeable professionals who understand how to design and manage these new relationships are involved. The most common complaint -- a poorly designed relationship -- can be directly traced back to inexperienced management."
But potential problems can arise within a company when jobs are eliminated, and an outside organization steps into the fold, says Van Pell, COO of Miglin-Beitler Inc., a Chicago-based full-service real estate company. "The process of outsourcing forces a question of a change in corporate culture and philosophy. The issue is raised of loyalty to employees who might be displaced by outsourcing," says Pell. "There might also be certain conveniences and benefits that senior officers and others in the corporation might enjoy from an in-house management staff that might get eliminated or greatly reduced by outsourcing. Corporations have to be very sensitive to these issues."
If handled carefully, there are a lot of advantages to outsourcing. Stein & Co.'s Bayley says: "First, outsourcing creates shareholder value by reducing costs and commitments to fixed and working capital ... Secondly, outsourcing helps a company focus on its core business, creating a competitive advantage within its industry. Other advantages include gaining access to best-of-class capabilities and accelerating the benefits of re-engineering."
Another advantage outsourcing gives corporations is a chance to get the best job possible from the people it hires, according to Randy Podolsky, president of Podolsky and Associates, based in Westchester, Ill. By using a third party, a company has more room to be critical of the kind of services provided. If the work is done in-house, there may be company ties which are hard to break.
According to many in the community of real estate service providers, outsourcing is big and getting bigger. "The best analogy I've heard is that corporate outsourcing is a wave that has not yet begun to form -- much less crest," says Bruce Ficke, senior vice president and head of national leasing and marketing for Atlanta-based COMPASS Management and Leasing Inc.
"I agree that outsourcing is becoming more common," says Pell of Miglin-Beitler, a company that has facility management contracts with such groups as the Daley Center for the Public Building Commission and Rush Presbyterian-St. Luckes Hospital, both in Chicago, and Firstar Bank N.A. of Milwaukee. "The real question becomes at what level is service being given; facilities management portfolio, leasing, etc."
"As a result of the outsourcing phenomenon, there are more property management companies attempting to move into facilities management," Pell continues. "The differences between companies will be the types of real estate and property management services offered, and the way their services are bundled."
Corporate America outsources for reasons that go beyond merely shedding excess personnel, according to COMPASS's Ficke. "I think they are concentrating on devoting resources to dealing with the essential parts of their businesses, as opposed to sheer headcount reduction," he notes. Outsourcing is an outgrowth of "the restructuring of companies to focus on core competencies," adds Ficke, with the real estate function being just one of the many functional areas affected.
Focusing on core competencies is the central reason behind the increased outsourcing of the real estate function, according to Paul Domb, vice president/asset management for Miami-based United Trust Fund, a buyer and financier of real estate that specializes in corporate sale/leasebacks. "If your core business is making cereal, you may indeed have a director of real estate and an idea of the locations you want to be in," he notes, but at the same time, "you may have to go outside your organization to get the expertise you need to implement your plans."
"It's raining RFPs" says O.B. Upton III, executive managing director of corporate services for Cushman and Wakefield, from his office in San Francisco. "The fundamental reason behind the rush to outsource is the same as it has always been," he notes. "There is enormous pressure on major corporations to establish competitive positions in a global marketplace. I think most of them feel that in order to do that, they have to look primarily at efficiency and cost containment, rather than relying strictly on revenue increases."
The need to compete is the major factor behind the current brisk pace of corporate outsourcing, agrees Ira L. Williams II, senior vice president for Axiom Real Estate Management, Stamford, Conn. "Outsourcing is not strictly a function of corporate downsizing," he says, "but, instead, it is a major part of creating competitive organizations."
Outsourcing is not really a new phenomenon, says Williams. "People have jumped on the word 'outsourcing,' but what is being done today is not really anything new." He maintains that companies and organizations have always had to decide whether they should perform certain functions themselves or bring in someone from outside.
The extent of the function delegated determines whether true outsourcing is taking place, adds Williams. "Outsourcing, as I define it, means moving the management responsibility, along with the work, to another party," he says. In many instances where a company "farms out" certain real-estate related tasks, Williams says, "I might call that 'outtasking' as opposed to outsourcing."
"I don't think the pace of new outsourcing agreements is as fast as it has been in the past," says Catherine Howard, director of CB Commercial/Madison Advisory Group, a Los Angeles-based company that focuses on multi-market acquisitions/dispositions, outsourcing, preferred vendor and partnering relationships with corporate clients. "I don't know if it is a cyclical phenomenon or not," she says. There are still a lot of RFPs out, but there were many more a couple of years ago, says Howard, adding that "companies may well be happy with the service providers they have been working with."
The number of companies giving serious consideration to outsourcing the real estate function is growing, and these companies are looking for a broader scope of services to be provided, says John Wallerius, managing director of Chicago-based LaSalle Partners. "Companies used to look for someone just to handle transactions," he notes. "Now they are looking for property management, design and construction and strategic planning -- along with the transactions."
Trammell Crow's Concannon points out that the trend toward partnership styles of outsourcing has caused new developments such as "the rise of the 'umbrella' service provider who is able to administer contracts covering a number of functional areas on behalf of a client. For example, TCCS currently manages architecture and design contracts for Travelers, a facility and project management customer. In addition, many facility management accounts now carry responsibility for cafeteria, mail and transportation activities, says Concannon.
"Comprehensive" describes the scope of services involved in a recent outsourcing contract involving Cushman & Wakefield and telecommunications giant GTE, according to O.B. Upton.
GTE recently selected Cushman & Wakefield to provide all services "necessary to manage and administer their real estate portfolio, which includes some 12,000 buildings comprised of owned and leased space, along with some raw land," in the eastern and western portions of the U.S., according to Upton. "They are looking to us to provide not only transactional work, but lease administration, project management, tracking and reporting services," he explains, "as well as work previously done by in-house staff that includes interfacing with the internal business units and employing/ managing outside consultants."
As of this writing, COMPASS is negotiating an outsourcing agreement with "a major national space user" for what is "an entirely new business line for us," adds Ficke. The assignment will involve handling the entire space coordination needs for this company nationwide, he says. "We will help them on the front end in determining space standards and determining the types of buildings they need for various business units," he explains.
"We will evaluate the space requests of the individual business units, help them locate space and negotiate leases," says Ficke. "The leases will then be entered into our lease administration computer program, and we will administer them for their entire duration -- approving monthly invoices from landlords and annual escalation bills and dealing with every aspect of the lease from needs determination, to disposition, through subletting when the time comes."
The geographic scope of outsourcing agreements is also expanding. "We are running into more companies with international requirements," Wallerius says. "More of our activity involves a broader range of services that cross geographic boundaries." In these instances, the real estate service provider "has to be more open to partnering with other providers who may have more competency in a particular service area," he notes, a course of action that serves to "supplement geographic reach."
"The biggest single trend we are seeing is a substantial increase in the desire to outsource internationally," adds Upton. Cushman & Wakefield was recently selected to service the international real estate needs of firms that include AT&T, Amoco and TBS. Providing services in the international arena "is an enormous undertaking," he says. "But, for the service providers that will be competitive in the outsourcing arena in the future, it will be an absolutely essential capability."
Corporate facilities management
Competition for outsourced corporate facilities management contracts, whose scope can expand from simple building operations management "to include reprographics, mail-room operations, shipping, receiving, industrial hygiene, environmental and construction management," is very keen, according to Axiom's Williams. It is a process that he says "requires the service provider to fully understand both the client's facility and strategic business objectives."
Outsourcing facilities management is a major trend in the corporate real estate world, according to Timothy Darrah, senior vice president of corporate facilities and property management for Atlanta-based CARTER. There are some important nuances involved here, though, that differentiate the process from the typical property management assignment, he notes.
"In corporate facilities management, the facility is viewed not only as a company asset, but also as a physical manifestation of the corporate image," Darrah says. "It requires the same technical skills and experience that have always been required, but the management team must be more sophisticated in general business than ever before." Because the facility, particularly if it is a headquarters operation, "is integrally tied to the persona of the corporation," the service provider "must have the interpretive skills to identify, understand and empathize with the corporate culture of the owner, and this understanding must be reflected in the daily operation of the facility."
Meshing with the culture of the corporate client is an important part of playing in today's outsourcing arena as a whole, says Ficke. "What corporate clients look for is a provider that has the same culture, the same approaches to problem-solving and dealing with service issues," he notes. When corporations outsource to a service provider, "what they want is a transparent situation," adds Ficke. "When the COMPASS employee comes in to service the chairman's thermostat, that chairman wants to feel like the COMPASS employee is part of his company."
In addition to feeling that there is a culture match with the provider, the corporate client also looks for a number of other things from its potential outsourcing partner.
"There has got to be a belief that you can deliver quality service," Ficke says. By the time the interviewing of service providers begins, however, they have typically been so pre-qualified that what really starts is a search for intangibles, he notes. "Corporate America is looking for service providers with the qualities of honesty, trust and integrity," according to Ficke.
"You first have to present yourself as a resource that is an extension of the corporate real estate operation, a partner rather than an adversary," says C & W's Upton. It is also important to remember that today's corporate clients are much more discerning than they were even three years ago, "particularly those that have previously entered into some form of outsourcing agreement," he notes. "Clients now want the service provider to show proof that it has the resources to do the job -- not just a lot of marketing hype," says Upton. "They want to see a service delivery network that is real -- not just pins on a map. There also needs to be a commitment by the service provider to the latest in information technology, with the hardware and the software already in place."
"To gain a contract," Podolsky says, "management companies have to be able to be full serviced and highly mechanized with state-of-the-art reporting -- able to take care of asset and property management."
Management companies can provide technological advancement beyond what a corporate real estate department may currently have, says Jack R. Koon, president and CEO of the corporate services group for Houston-based PM Realty Group. "Outsourcing to a service provider that utilizes state-of-the-art PC software and hardware technologies allows the corporate real estate group to 'upgrade' immediately with a broad range of technically complex issues, including: networking, remote communications, client-server applications, E-mail, groupware, database management, accounting applications, graphics, Windows optimization and support, etc."
PM Realty Group, which provides management services to a number of companies including Texas Commerce Bank, Chevron and Houston Lighting & Power Co., gives its clients new technological services such as PC-based preventive maintenance and service request programs, financial reporting systems and accounting programs.
"You have to show corporate clients how outsourcing will make their lives easier," says CB Commercial's Howard, "by allowing their corporate real estate departments to move away from being order takers to being formulators of business strategy."
Corporate comments
Not all members of Corporate America have jumped on the real estate outsourcing bandwagon. But they all know about it, and many of those who have not are actively examining the possibility of doing so.
"We have always used a variety of outside services to assist us with our real estate needs," says Mark A. Beattie, manager of the real estate department of global industrial manufacturing giant 3M, based in St. Paul, Minn. Up until recently though, the company had not taken an active role in moving out day-to-day real estate functions to service providers, he notes.
An internal operations analysis revealed an inordinate amount of time spent on the company's leased properties, i.e., properties owned and/or leased to others by 3M, according to Beattie. Although these properties represent a small part of 3M's portfolio, "they require a significant amount of time in terms of day-to-day activity," he notes. "The value-added wasn't there as it relates to the overall services we provide to the corporation," says Beattie, "and we looked at this as an opportunity to consider outsourcing." Eschewing the traditional RFP process, 3M has interviewed a number of service providers with no selection announced as of this writing.
Prior to entering into outsourcing relationships with Cushman & Wakefield and the New America Network last year, Bell Atlantic historically put individual real estate transactions out to bid as the need arose, says real estate manager Steve Masterman. "When we first considered the idea, we were interested in bundling transactions to produce economies of scale, translating into savings for us," he explains, along with "increasing our ability to standardize and control the quality of the real estate decision-making process." This telecommunications firm also "made a conscious decision not to give up the strategic planning function" in this outsourcing relationship, notes Masterman, a relationship that, "with a few minor adjustments," is still intact.
David McComas, CCIM, manager of corporate real estate for Memphis, Tenn.-based FedEx Corp., was faced with the problem of "the corporation not wanting to expand personnel -- combined with work requirements that were growing." An outsourcing agreement with Dallas-based Fischer & Co. got McComas a customized, computerized management information system "through which I can manage my real estate portfolio, prioritize opportunities and report on outcomes."
A separate agreement with Stein & Co. gave FedEx new capabilities in development, construction and financing in return for transaction-related work, McComas reports. Meanwhile, an agreement with the Commercial Tennessee brokerage firm gave McComas' department an additional administrative person, in exchange for handling transactions in the Memphis marketplace.
"Outsourcing used to be a cutting-edge trend, but now it has come of age," McComas adds. "Most corporations that are going to develop such partnerships have done so by now and have probably gone through at least one evaluation cycle," he notes. FedEx has elected to continue outsourcing as a way of dealing with its real estate needs, says McComas; when it comes to other large companies, "some will no doubt drop it, while others will continue to do it."
Fred Parrow, manager of office leasing for corporate real estate for Shell Oil Co., Houston, describes himself as "one of the first to embrace outsourcing." He maintains what he calls "an informal strategic alliance," with the ONCOR International Network and San Francisco-based Grubb & Ellis, "I am the manager of the outsourcing process," says Parrow. "I make sure all goes well for my internal customers, while my single point of contact with each of my partners helps me communicate my needs to brokers in the field."
Corporate real estate managers often fear a loss of control through outsourcing, something "that just hasn't happened," according to Parrow. He sees real estate managers "becoming more involved in the corporate strategic planning process, as divisions plan future moves." A lot of the questions that need to be answered in this process require in-depth research data on local real estate markets, he notes. In these instances, "service providers help me develop my information and presentation -- because they are the ones that have the research capability," Parrow says. Indeed, he now often "brings my service provider to the meeting table with me," something regarded by many of his peers in the past as "a heresy."
Service providers face problems of companies feeling threatened and being hesitant to outsource their real estate business to someone else, says Kent Clark of Bock & Clark, a survey management company based in Akron, Ohio. "We've altered our marketing to focus on alleviating that misperception ... Today's corporate real estate executive is now faced with performing an ever-growing list of tasks. We have focused our efforts on selling the 'spend your time on more productive tasks or core responsibilities and have us procure surveys for you' concept. This approach has worked for us, and we have many strong relationships with real estate professionals because of it."
"We started outsourcing close to two years ago," says Roy Dohner, real estate vice president for communications equipment manufacturer at NORTEL (formerly Northern Telecom), based in Maclean, Va. "We used to have five people that managed acquisition transactions in the United Sates," he notes. The company has outsourced this process to Fischer & Co., with The Barnicke Co. handling Canadian transaction work, two alliances "which allow us to manage transactions in the United States, Canada, and Latin America with three people," Dohner says.
Outsourcing is nothing new, according to Dohner. "It is a new word, but corporate real estate executives have been using brokers, architects and planners forever." Outsourcing means more of the same, he notes. "The only thing different is that we are relying more on outside service providers with fewer people within the company designated to do the job."
Many corporate real estate executives initially resisted outsourcing "because they feared downsizing and a lessening of respect," says Dohner. "That didn't happen," he notes, adding that "People that embrace change flourish, those that don't become extinct."
"We are looking at hiring a number of in-house project managers to assemble teams and outsource some parts of our real estate operations," says John Brophy, real estate vice president for USG Props., a wholly-owned subsidiary of building materials manufacturing behemoth USG Corp. This approach makes sense in light of the structure of his parent organization "which has such a wide variety of real estate, that handling all is beyond the scope of any one service provider."
Brophy has mixed feelings about outsourcing. "We often get lost in the jargon," he notes. A lot of companies embrace this approach for the wrong reason, he adds. "They do it because it looks less expensive than the in-house alternative," says Brophy. "It is, but only when you look at all your costs over a long period of time, because the initial setup can be a very costly operation." The acid test of outsourcing for any corporate real estate department is "that it has to be better, faster and cheaper," he adds. "If it is not all of these -- why do it?"