When Ameritech, the telecommunications giant that provides telephone service to more than 12 million customers in the Midwest, decided to outsource the most important component of its real estate operations, it "stepped outside the box" and did things a little differently.
Faced with today's corporate imperative to focus on core functions and leave the rest to outside service providers, Ameritech turned over management of its facility design/construction/management function to ASC Co. L.L.C., a limited liability company formed by Chicago-based Stein & Co. and Denver-based CRSS Constructors Inc. In a 1994 deal that has been called the largest real estate outsourcing arrangement to date, ASC took over the care and feeding of the real estate that supports Ameritech's stretch of the information superhighway, a portfolio comprised of some 50 million sq. ft. of space in 3,000 buildings in five states.
Unlike what has often been the result of corporate re-engineering, this shedding of the corporate real estate function did not result in a wave of former Ameritech employees hitting the streets in search of new jobs. And it also did not result in a typical vendor/vendee relationship between ASC and Ameritech.
"We told Ameritech that we were going to form a new company that focused entirely on their organization," recounts Raymond Bayley, managing director of Stein & Co. and chairman of the board for ASC. "We also made the commitment to make job offers to all in-house employees currently providing real estate services for Ameritech."
The end result is a company largely built on the skills and experience of former Ameritech employees "who get a chance to grow and enhance their careers with a new company," Bayley says.
And as may be expected, the new company has a pretty unique relationship with Ameritech. "We consider ASC to be a kind of alter-ego to Ameritech," says Bayley. ASC in effect "owns" the portion of Ameritech's real estate budget that relates to its work, he notes.
At the beginning of each fiscal year, "we draw up the real estate budget for Ameritech, and then we do all the work, explains Bayley. In effect, "ASC has a checking account with Ameritech money," he says, "and we spend it as though we were Ameritech employees."
The relationship between Ameritech and ASC is what many in the corporate real estate world call a "strategic alliance." Like "outsourcing," "preferred-provider" and a wealth of other business buzz-terms, strategic alliances are a product of the continuing wave of corporate restructuring and downsizing that began in the early 1990s. As is the case with outsourcing and preferred-provider relationships, the strategic alliance is one means by which companies can simultaneously cut costs and maintain quality by relying on outside service providers for functions seen as ancillary to their core business.
Definitions
Like truth and beauty, most people in the real estate community think strategic alliances are a good thing, but they have to go to some pains to define exactly what strategic alliances are and, particularly, how they differ from plain old outsourcing. A concise definition "is difficult to articulate," says O.B. Upton III, executive managing director of corporate services for Cushman & Wakefield, from his office in San Francisco. "Ask 10 brokerage firms or corporate users what a strategic alliance is, and you'll get 10 different answers; it's not unlike asking 10 brokers to definenet lease."'
Having helped engineer more than a few relationships of this type, including recently formed strategic alliances with GTE Corp. and Saks Fifth Avenue, Upton does have a pretty good way of explaining them. He says to view relationships between companies and their real estate service providers as comprising a kind of food chain with simple outsourcing at the bottom, simple alliances in the middle and strategic alliances at the top.
"At the traditional outsourcing level, a company hires a service provider to perform a specific task or tasks," explains Upton. Like any vendor/vendee relationship "there is almost a certain amount of `adversarialism' inherent here, because the relationship is based entirely on the exchange of money for tasks accomplished."
Commitment comes into play as one moves up the chain. "At the next level is the formation of an alliance, where the service provider and the client company make commitments to each other," Upton says. In particular, "the service provider makes commitments to provide services at special prices", he adds, "and also makes an extended commitment to the client's overall business objectives."
Commitment by both parties, along with the added element of trust, comes to the fore at the top of the chain. "At the strategic alliance level, there is a complete commitment to the relationship by both sides," says Upton. The client company takes the service provider in, and vice versa, as a true business partner in an open, trusting, mutually beneficial relationship. "The books on both sides are open," Upton says, and "both parties share all of their resources to collectively think and function strategically in the marketplace, as opposed to just responding to individual situations."
"A strategic alliance is a step beyond simply subcontracting with a specialist company," says Ira L. Williams, senior vice president of the corporate facilities management group for Axiom Real Estate Management Inc., Stamford, Conn. "The alliance enables us to get to know each other professionally and to build a long-term relationship based on trust and confidence."
Williams sites a particular example of a strategic alliance that Axiom has to give particular services to its clients. "We have architects on staff, but for complex design tasks, we go to our strategic alliance partners Parsons Main. Similarly, they come to us for certain areas of Facilities Management expertise."
Actually, Axiom itself is a strategic alliance, points out Steve Pope and Dennis Burnside of Grubb & Ellis. Axiom was formed as a result of a strategic alliance between Grubb & Ellis and IBM as a way to serve all the needs of the companies.
Grubb & Ellis uses strategic alliances to give better quality service to its clients, says Pope, senior vice president and director of marketing in the San Francisco office.
"Clients prefer single points of contact, but we can give them a menu of services to choose from," says Burnside, national director of the corporate services group for Grubb & Ellis out of the Detroit office.
A strategic alliance is an inherently long-term relationship, notes Clive G. Mendelow, president of Philadelphia-based Binswanger Advisory Group, while an outsourcing or preferred-provider relationship "may be one where the service provider is utilized on an as-needed basis." Secondly, he adds, a strategic relationship is one that has a number of the elements of a partnership between the client and service provider.
"There is a genuine intent to work together on a long-term basis to achieve common goals," Mendelow says. "The essence of a strategic alliance is the word `strategic,' whereby the corporate client educates the service provider on the overall goals of the corporation," he says, resulting in a provider "who then becomes fully conversant with and understands the objectives of the corporate program."
Strategic alliances between companies and service providers are well-defined from the start, according to Tad Jones, senior executive director for CB Commercial/Madison Advisory Group, a Los Angeles-based entity set up for the express purpose of pursuing such relationships.
"All the relationships we enter into are contractual in nature, not at all loosely defined," Jones says. "We enter into contracts for a given period of time, generally two to four years, to perform certain functions generally given to us through an RFP (request for proposals) process."
A strategic alliance is a lot like the state of matrimony, says Cushman & Wakefield's Upton. "A good strategic alliance, like a marriage, is built upon commitment and mutual trust," he says, adding that "you make the commitment, but the trust is earned."
Recently, The Galbreath Co. created a new business unit dedicated to the establishment of strategic alliances with corporate America. The new unit, the Corporate/Industrial Services Group (CISG), is based in Galbreath's midwest region and has offices in Cleveland and Dayton, Ohio.
"Galbreath CISG serves as an extension of the corporate real estate staff and may be responsible for annual budgets and regular reports for corporate management as well as the day-to-day administration and execution of real estate agreements and records," says Harry Henshaw, who is a Galbreath senior vice president and one of the heads of CISG. "We draw upon the full resources of The Galbreath Co. to assist in major transactions, facility management and development."
The benefits
The strategic alliance marriage analogy is apt, according to John Englert, director of property management for Rochester, N.Y.-based Eastman Kodak Co. In both types of relationships, "you have a set of principles, as does your partner. You both realize that the chemistry between you looks reasonable, and you make the decision to proceed," Englert says. And, under both scenarios, 41 the umbrella word is `trust,"' he adds, "because the relationship is going to take you to some places both of you have never been before."
Facilities management is the backdrop for this camera and film products giant's strategic alliance with International Service System Inc. (ISS), a major supplier of contract facilities cleaning services. The relationship began in 1992 when ISS took over the internal custodial duties of Eastman Kodak, assuming responsibility for a function that had been performed by both in-house staff and outside contractors for some 1.6 million sq. ft. of real estate.
Initially, the benefits of the relationship are the same as those sought in any outsourcing arrangement: a lowering of Eastman Kodak's overhead costs and improved services. But when a relationship is strategic in nature, there can be more benefits involved than simple cost savings and good service. Strategic alliances can provide the framework for the entities involved to both improve their operations and expand their business horizons.
"For example, we do a lot of travel," explains Englert, "so, we have a lot of travel processes in place." In this strategic relationship, Eastman Kodak can share its experience with ISS, "and give them some things they might want to think about that will help them run that part of their business better and help keep them cost-competitive."
Reaching the point where both partners in an alliance feel comfortable doing these kinds of things takes some time, notes Jan Kaupas, COO of ISS. Indications that the alliance is indeed strategic include: "service or product delivery at a quality level where both parties know you have moved beyond the typical vendor/vendee relationship," he says.
In February 1995, Atlanta-based Compass Management and Leasing entered into a strategic alliance with AT&T's Global Real Estate Unit. "It became clear as we talked that they did not want an outsourcing relationship," says Ralph J. Diruggiero, senior vice president for Compass. "What they wanted to do was recreate their in-house property management organization to operate more like a commercial firm, one that would be able to compete with any other property manager in the market lace."
Compass' role in this strategic alliance is not that of property management service provider for AT&T's 120 million sq. ft. of real estate nationwide, but rather, one of mentor, DiRuggiero says. "Our job is to guide, assist and help change an institutional/corporate property management organization into one that follows a commercial model - and the model they obviously like is ours."
The value of strategic alliances does not always come out of a service provider/client relationship. Chicago-based Miglin-Beitler finds benefits in forming strategic alliances with other real estate services providers in both ongoing and project-specific situations.
"We see these alliances as being very valuable," says Van Pell, COO at Miglin-Beitler. Whether formed for the purpose of opening up new markets or servicing the needs of a specific client, he notes, strategic alliances provide the framework in which "two groups can bring together complementary skills that form a team, where the whole is better than the sum of the parts."
Robert L. Freedman, vice chairman of the board of Williams Real Estate Co. Inc., New York, says that using a strategic alliance helped his company compete in the global marketplace. GVA Worldwide is an international partnership which started out as a strategic alliance.
"The benefits from an alliance are self-evident. There is the critical mass that is established when working in any business enterprise comprised of 40 firms with 67 offices worldwide, 3,300 real estate professionals in 20 countries, a transaction volume of close to $50 billion and 1 billion sq. ft. of property management," Freedman says. "There is a great deal of cross-pollination for our business development."
Managing alliances - a few pointers
A successful strategic alliance requires a "correct mindset" on the part of both the corporate and service-providing partners, according to Binswanger Advisory Group's Mendelow. "At the outset, the relationship must be viewed as a long-term alliance, devoid of short-term motives and based on mutual honesty, openness and trust," he notes. The corporate client must provide, and the service provider must maintain, "a broad knowledge of the overall corporate strategic plan, the nature of its business and its objectives," Mendelow says. Meanwhile, the service provider must keep in mind that the alliance "is a team effort focused on a process, namely, to fully understand the corporate need and to provide outstanding, best-quality' results for the corporation and its business units."
"When you have a regional or local manager of a business unit that is doing well in an outlying area, or even another country, Mendelow explains,and a real estate directive is issued from corporate headquarters, it can be extremely difficult to get that manager to implement, because they often feel as though they would like to be running their own show."
This feeling is understandable, given human nature, Mendelow says. Overcoming it and getting the work done requires some high-level people skills on the part of the service provider. "It is essential that the provider must have people with a high level of interpersonal skills that allow them to persuade, motivate and bring about the desired results, hopefully without any kind of contentiousness," he says. Business unit managers can then "be brought `into the loop' and incorporate the objectives of the corporation with their own without feeling that their turf has been invaded or that there is a battle under way."
Tips for service providers
Real estate service providers that want to establish the marriage-like relationship that characterizes a strategic alliance need to keep a few things in mind when they come courting Corporate America.
In the compensation arena, service providers need to be aware of the growing trend towardgain-sharing," i.e., sharing of commissions between provider and client, according to Fred Parrow, manager of office leasing for corporate real estate for Shell Oil Co.
Large companies such as Shell are looking at giving their real estate business to a single service provider, he notes, based upon service capabilities and the level of gain-sharing they will accommodate. "Our approach will be to let the competing service providers decide on the level of gain-sharing," Parrow explains. Ultimately, he adds, "We will then award business to one firm and operate as partners on all deals, large and small."
Sean McCourt, vice president of corporate real estate services for Dearborn, Mich.-based Ford Motor Co., notes that his department uses the strategic alliance vehicle "to improve our relationships with our internal corporate clients, reduce the amount of time it takes to complete transactions, lower costs and deliver a consistent product." Service providers in a strategic relationship "have to bring a lot of flexibility to the table," he says.
Fully understand the business of the company you are seeking a strategic relationship with, says Bob Gilbert, vice president of real estate for American Express Financial Corp., Minneapolis.
It also is important for service providers to provide full information on their resources and processes "so that there can be a mutual understanding about how things will be accomplished, how performance will be measured and what compensation is to be based upon, so that there is a strong feeling of openness and involvement on both sides," Gilbert says. In a strategic alliance, both service provider and client "are working together toward a common goal," he adds, which is to provide a reasonable profit and meaningful employment for one group, while the other side gets services that are meaningful and cost effective."