P&G goes global
As the financial and economic crisis slows growth, hits corporate profitability and puts pressure on margins, companies have increasingly sought to focus on their core competencies and offload specialized and expensive support activities. For many corporates, real estate forms a central part of their asset and cost base and inevitably the hunt to deliver savings in this area has intensified: outsourcing has been the principal beneficiary of this trend.
"We have seen a three-fold increase in RFPs [requests-for-proposals] for real estate outsourcing in the past year and the increase has accelerated in recent months as the financial crisis has intensified," says Robert Bonwell, head of corporate solutions at Jones Lang LaSalle. "In an environment of unprecedented uncertainty, corporates want to consider every available option to remove costs from their P&L." Practitioners at rival firms confirm a similar increase in the scale of enquiries over the past year.
Outsourcing has been a central theme in many areas of corporate business life over the past two decades. Starting with information technology and human resources, successive departments of corporates – once deemed integral to their existence – have been outsourced to third-party providers. The outsourcing of real estate, which began in the early part of this decade, was just a question of time.
Property outsourcing typically involves a corporate transferring responsibility for its real estate portfolio to a specialist real estate company based on three- to five-year contracts. Unsurprisingly, there are numerous models of outsourcing but it can include facilities management, delivery of property either through transactions or projects, transactions and advice and estate strategy and asset management.
The rationale for outsourcing is straightforward. "It is driven by a need to reduce costs, improve governance, increase flexibility and open new options in terms of how the real estate portfolio is structured," says Bonwell. Jones Lang LaSalle typically sees cost savings of 10% to 20% over the first two years of a contract and continuing savings on operational costs of 5% to 10% compared with a corporate running its own services. "On a €1 billion run rate that’s a considerable saving," says Bonwell.
Stepping stones
Corporates interested in outsourcing might dip their toe in the water with service-level roles. But ultimately it can result in a real estate outsourcing company taking full responsibility for running that corporate’s portfolio, including interfacing with customers. In order to fulfil such a role, a provider of outsourcing services requires not just experience of real estate management, governance and financing but also specialist knowledge of health and safety, business recovery and other issues relating to the specific use of premises.
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"The most important part of outsourcing is finding the right people"
Robert Bonwell, Jones Lang LaSalle |
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Only a few companies are able to provide such a breadth of services. Often property specialists from corporate clients transfer to work with real estate outsourcing companies as part of outsourcing contracts to ensure that the specialist knowledge of the assets and services being outsourced is retained. "The most important part of outsourcing is finding the right people," says Jones Lang LaSalle’s Bonwell.
Real estate outsourcing started in the US – aided by the centralized nature of many corporates there – and initially focused on the financial and information technology sector. Interest in the financial sector derived from its mature and results-driven nature and the desire to cut costs. In contrast, the IT sector embraced outsourcing because of the relative immaturity of the market: with little legacy infrastructure it was easier to consider new business models.
"Now almost all sectors – from oil and gas to pharmaceuticals – have recognized the benefits of outsourcing," says Bonwell. "Geographically interest has expanded from the US, where outsourcing began, to Europe, where the more decentralized nature of corporates has meant it initially took longer for them to adopt outsourcing. Now more have grasped the opportunity. The concept of outsourcing and its benefits are now deeply embedded among CEOs."
Tailored strategies
Outsourcing models vary enormously between companies as no two corporates have identical business strategies, operational structures and requirements.
"As the business has expanded into Europe the flexibility of outsourcing has become increasingly important," says Bonwell. "Whereas it is possible to describe a generic model for centralized US corporates, such a structure is rarely seen in Europe for both operational and geographic reasons. The decentralized nature of Europe means it’s about finding the right solution to maximize opportunities for corporates."
Nevertheless, in order for a corporate to gain the maximum benefits from outsourcing it is crucial to take as high a level view as possible, notes Bonwell. "Ideally, a corporate should be considering outsourcing its real estate requirements at a global or regional level in order to maximize the value benefits," he says. "However, a large portfolio in one country is capable of achieving substantial benefits."
The success of Land Securities Trillium – one of the largest companies operating in the outsourcing and public-private partnerships sector (which involves private money in public sector capital procurement) – with a number of UK-centric clients is testament that outsourcing can work in a single country provided an organization’s portfolio is large enough.
In addition to government bodies such as the Department for Work and Pensions and the Driver and Vehicle Licensing Agency, Trillium – the £1.5 billion demerger of which from Land Securities was delayed in November but is still expected to complete within a few months – has the Post Office and Accor Hotels as core clients. Trillium manages more than 2,000 properties across the UK, some 4.64 million square metres of accommodation.
Trillium’s focus on government clients – it won the £600 million Building Schools for the Future programme in Kent in October and is part of a consortium that won a £80 million contract in Inverclyde in Scotland also in October – is important to the company’s success. Nevertheless, a number of other outsourcing companies have opted not to work with the public sector and say that while government real estate and outsourcing are a natural fit, the bureaucracy that goes with contracts make them more trouble than they are worth.
