Five Considerations When Purchasing Outsourced Real Estate Services

Though the CRE function within an organization may provide input, support and the final decision, it’s typically the procurement/purchasing department shaping and influencing real estate outsourcing decisions. However, with the notable exception of large enterprises that staff procurement teams dedicated to buying a variety of real estate, most companies simply don’t have a purchasing staff with any significant experience buying real estate services. Services, including facilities management, database management, transactions management, workplace design, and project management, are very different and disparate with each requiring a high level of expertise to effectively procure. Combined with establishing a governance structure and appointing an account management team, the ultimate contract and commercial arrangements are often complex and require an experienced team for optimal results.

It’s reasonable to expect that those lacking services-oriented specialization, but who are nonetheless responsible for performing due diligence, leading prospective RE vendors through the RFP process and evaluating contracts, simply may not know to consider these five considerations central to any conversation with their organization’s prospective RE service providers:

1. Regional implications (and differences when contracting services globally)

Some organizations are more sophisticated than others in understanding the nuances of trying to deliver a contracted service across every region of the globe. For those that aren’t it’s tempting to believe that what works in the US will work in, say, India, China, the U.K. or Latin America. They lose sight of each country’s or region’s cultural differences and even the cultural differences present within their organization. Even large organizations with a centralized global real estate team need to be flexible, sensitive to each region’s societal attitudes, workplace practices, customs and norms. Likewise, a procurement person based in the US headquarters must fully understand how their organization operates in each country in terms of reporting structures and responsibilities. Soliciting and accepting input from various regions of the world is critical to a global outsourcing program.

2. Structure outcome-based incentives
Conceptually, outcome-based models – paying a bonus to a service provider that achieves a stipulated level of performance (typically stated as a percentage savings in existing global real estate costs) or penalizing a service provider for falling short of the savings target – make good business sense. Incentivizing performance, either positively or negatively, reduces risk to the client organization and requires the service provider to put some skin in the game.
This model, however, assumes that a baseline cost number for all real estate costs has been or can be accurately determined, often a highly complex computation requiring a substantial investment of money, time and resources. It may be feasible for organizations on their third or fourth outsourcing initiative, those that already have a good handle on their RE costs, but for organizations less experienced it can be an extraordinarily difficult number to compute. And unless the organization and service provider definitively agree on that baseline the relationship could devolve into one that is adversarial over the life of the contract. The advantage for the client firm is that interests and incentives are 100% aligned. For the provider, the incentives drive the highest levels of performance and innovation and are compensated accordingly. 
3. Matching scope to business needs
Every successful RE outsourcing engagement begins with an end in mind, a clear understanding of how the client organization ultimately defines a successful partnership. What are the desired outcomes? What are the business goals, needs and challenges that need to be achieved, addressed and resolved? What metrics will be used to gauge progress? A successful partnership requires that each service line identify levels of service, often tiered by business line or local needs, documents those needs, and then indicates which outcomes are required from the provider. 
Procurement professionals who drill down to the fundamental business needs and are willing to share them with prospective vendors will receive in return more creative, targeted and tailored approaches to addressing those needs.
4. Forge a partnership as opposed to a supplier relationship
A RE service contract may run a minimum of 3-5 years or longer. In every case, both parties are making a significant investment of trust in the other. Large real estate service providers resist being treated like vendors or tactical providers instead of true partners with aligned interests. Enough books to fill ten libraries have been written about partnerships, and there’s really no secret to what it means to be a true partner. Essentially, partnerships boil down to an alignment of interests, a convergence of expectations and a long-term emphasis on mutual benefits in lieu of a short-term focus on transactional self-interests.
5. Revenue timing for the service provider
By its nature, the service providers are required to make significant up-front investments – time, resources and money – before even winning a new client. Typical pursuits in the commercial real estate industry can exceed $100,000. The initial transition period is also an expensive process and then once the contract is operational, profits must be earned. This isn’t an appeal for sympathy, rather it’s a counterpoint to a common misconception about service provider revenues and profits. It’s a reality procurement teams should keep in mind as they evaluate service provider proposals. Contract structures which take these cash flows issues under consideration will benefit both parties over the life of the contract. 
In conclusion, a significant percentage of client and service provider relationships end poorly or struggle to succeed. The larger percentage enable the provider to gain and retain a profitable client and the service providers’ gain operating efficiencies, reduce costs and a genuine partner to improve their business. 

For more information, contact the author:

JD-Byrnes.jpgJ.D. Byrnes III
Executive Managing Director


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