Business Process Outsourcing (BPO) of corporate real estate has been evolving over the past decade, as companies have turned to outsourcing various functions to specialist firms in areas like facilities planning and property management. Today, some of the largest multinationals are turning to real estate outsourcing as a new business model to better plan and manage their investments for greater returns that will improve the bottom line.
Indeed, real estate is one of the three business processes that are most frequently outsourced to external service providers, according to the 1998 Global Top Decision-Makers Study on BPO, sponsored by PricewaterhouseCoopers and conducted by Yankelovich Partners, the well known market research firm. In this study of 304 major companies in 14 countries, as many as 65% of the executives interviewed identify real estate as one of the best candidates to outsource in the future.
However, multinationals may face some difficulties in getting consistently high quality real estate outsourcing services in different parts of the world, says Deborah Kops, Global Leader of Real Estate Outsourcing for PricewaterhouseCoopers. While service providers in different countries are capable of handling certain real estate functions, the fact is that real estate processes are managed and even defined differently in different regions, she explains. Before multinationals can achieve global consistency in their outsourcing programs, there has to be a common understanding of the definition of the real estate functions and core processes.
Defining Real Estate Functions
The real estate outsourcing market is most mature in the United States, Canada, United Kingdom and Europe, where there is a general recognition and acceptance that real estate processes can be outsourced effectively. Not surprisingly, these are the regions where there is more consistency and agreement in defining core functions and processes.
Generally, the marketplace views real estate as comprising three distinct functions: 1) deal transactions for the acquisition and disposal of real estate; 2) design and construction of buildings; and 3) property and facility management services. These functions make up the basic day-to-day operations that have to be managed effectively and efficiently.
A More Strategic View
But in addition to the operational side, some forward-looking executives are taking a more strategic view of real estate planning and management, notes Kops. They are looking at real estate in terms of developing the infrastructure needed to support the company’s strategic business plan. They want to make sure the company has the right real estate, where and when needed, at affordable prices. They are focusing on three areas:
- Strategic Planning: What real estate is really needed, how will it support our business, how will mergers, consolidations, and operating changes impact our real estate investments?
- Procurement of Buildings/Services: Where do we locate facilities, how much space is needed, how should it be financed, do we lease or buy, how should it be built out?
- Performance Measurement/Accounting: What performance measures should be used to manage occupancy costs, improve property utilization, and build shareholder value?
These are the kind of questions that more executives are asking these days, because they know that the right answers can mean better investment decisions and significant savings that add up to tens or even hundreds of million dollars. This more strategic approach to real estate can add real shareholder value to an organization on a long-term, sustainable basis.
New Real Estate Outsourcing Model
Among Fortune 500 companies, real estate typically accounts for about 20% to 30% of total assets, and for about 5% to 15% of operating expenses, Kops points out. Companies have billions of dollars invested in land and buildings, yet few are properly managing these hidden costs. She observes that real estate departments are seldom an integral part of the strategic business plan. Also, many real estate functions are highly fragmented among the business units, with employees and contractors operating on a project-by-project basis without a plan.
Indeed, most top executives regard real estate as not being core to their fundamental business operations. According to the Global Top Decision-Makers Study on BPO, about four out of five (79%) of the executives identified real estate as a non-core function, more than any of the other business processes that they ranked as non-core versus core.
Under the new real estate outsourcing model, senior executives need to plan and manage their real estate investments on a more strategic and cost-effective basis, Kops says. This means developing global solutions to integrating the many real estate functions, and real estate plans for different countries and business units. It involves looking at the infrastructure needed to support their operations, as well as the economics of different locations and local market conditions. They need to manage the acquisition, development, and disposition of property to get the best values. And their service firm should bring core competencies in finance, accounting, procurement, and information systems to support ongoing operations.
To manage day-to-day operations, the service firm should establish a Centre of Excellence with a multi-disciplined team of outsourcing specialists who take a holistic approach to managing the many inter-related real estate processes, according to Kops.
For example, PricewaterhouseCoopers established a Centre of Excellence to provide real estate outsourcing services for a major telecom client, including design, engineering, construction, facilities management, procurement, and accounting. Over the past four years, the outsourcing team of 200 specialists created nearly $200 million in added shareholder value, with 40% productivity improvement and customer satisfaction levels exceeding 97%.
Also, for its innovative real estate outsourcing services to another client, William Beaumont Hospital in Royal Oak, MI, PricewaterhouseCoopers was the recipient of InfoServer’s Editor’s Choice “Most Visionary Relationship Award” in 1998.