Baxter International Inc, a global healthcare company, found itself at the mercy of market forces in late 2003 as deregulation began taking over the energy industry. The fluctuations created pain for the company; it did not want to get hurt based on the fluctuating, commodity-based prices. It needed expertise over this non-core function, which it did not have.
“Until a few years ago, energy prices were relatively stable,” says J. Christopher Perdue, Senior Director of Market Research for UtiliPoint. “But now it’s a volatile market producing increases of a third to a half in a short time, primarily due to higher fuel costs.”
“Our expertise in this field–both electricity and gas–had pretty much outstripped our limited ability to manage this changing energy market,” says James Hall, Baxter’s Senior Director of Facilities.
Fortunately, Baxter had the solution close at hand: its longtime Facilities Management (FM) provider, CB Richard Ellis (CBRE) along with its provider-partner, Constellation Energy. Hall says its “long, successful track record” with the Trammell Crow Company, which CBRE purchased in 2006, made it logical “to take this problem to them first.”
That was a wise move for this firm that owns 22 buildings, totaling 7,200,000 square feet in eight states. Over the life of the three-year energy management partnership with CBRE, Baxter realized its goals of mitigating risk, leveraging provider expertise/efficiencies, and keeping true to its business core as a healthcare provider. But also, Baxter’s overall savings on total energy rates (both actual and avoidance of higher open-market-rates) reduced payroll costs, and the elimination of other related expenses has been about $10 million over this now three-year engagement.
Longtime Outsourcing Partnership Leads to a “V-8 Moment”
No one within Baxter was following energy procurement when management handed the job to Hall. And he quickly realized that this volatile environment was, in his words, “a classic ‘the more you learn, the less you know’ experience.”
Hall says, when the issue got too intricate, he discussed the situation with Doug Bushing, CB Richard Ellis’ Global Director of Sustainability and Energy Service. The two decided to fashion an outsourcing plan with their FM provider with Bushing introducing Baxter International to Constellation, he says. “I stepped back and let them build this energy management program and trusted their plan based on our history with (Crow)/CBRE. It’s worked as well as can be expected.”
Brad Christensen, Senior Director, I2I Product Development for Constellation New Energy, says outsourcing is a good idea because there’s lack of transparency in energy markets because they are an over-the-counter market. He says the CBRE/Constellation shared-services package essentially creates a new market with better transparency. “This gives them an understanding of market movements and appreciation of why things are different.” The shared-services package includes rate structures and other factors that affect them, such as conservation and other “green building” issues.
“Outsourcing to energy management program providers allows building owners to transfer some ‘rate risk’ to a third party,” adds Perdue. “This enables them to focus on their core. The cash they save is at times not as important to the buyer as the ability to focus on core and mitigate risk.”
“Energy is a top priority across our portfolio,” notes CBRE’s Bushing. “And the need for an outsourced management process is apparent. Our clients expect us to provide a workable management plan, which brings value, for this changing marketplace rather than short-term benefits at the expense of better long-term outcomes.”
Multiple Benefits…Even if You Have to Look For Them
Baxter’s Hall agrees with Perdue about the need to focus on core issues. “We’ve been outsourcing non-core tasks and services to providers for almost eight years and the greatest driver is keeping to our stated business path–medicine–and generally mitigating risk.
Of course, the healthcare provider appreciates the savings. “If you add all the numbers from a lot of different line items, we’ve probably saved $10 million over the three-year life of this engagement when you factor in the transfer of 65 employees to CBRE, the money we saved on rates directly, and the money we didn’t over-spend had we still been subject to open market rates.”
But, he adds, that’s just the dividend. “What we value most is having a competent partner–partners actually–who are looking out for our best interests in an industry we know too little about. This allows us to continue focusing on being the best healthcare provider we can be.”
Constellation’s Christensen further explains his role in this successful triad. He notes that Baxter’s general cost-avoidance factor (in rates and management of both electricity and gas) is currently running in the 10-20-percent range of the open market prices for both these commodities at any given time. CBRE’s Bushing puts it closer to 15 percent, but adds there other factors having less to do with the actual energy provided that produce his figure.
Hall says the two partners have had a team approach from the beginning of their relationship, well before this engagement. “And a lot of that comes from our long period of success first with Crow, and now its new parent CB Richard Ellis.”
Hall further notes that since Crow and Baxter were pioneers in FM outsourcing dating back to 1991, they had to learn this “brave new outsourcing world” together. “We reached a point somewhere in that third year where we both agreed that successful outsourcing is based on interdependency at both the strategic and tactical levels. Good outsourcing relationships display intimate interaction at many levels between both provider and buyer.”
“History is its own benchmark,” concludes Perdue. “When a trusted provider offers expanded service solutions to new problems, the shared culture between outsourcing buyer and provider can lead to deeper and more productive relationships, especially when they work, right?”
Lessons From the Outsourcing Journal:
- Outsourcing an energy-management program offers benefits of both mitigated risk and relief for enterprises to focus on their core in addition to nominal-to-generous savings over open-market rates that govern energy commodities.
- Experienced Facility Management outsourcing providers are aligning with equally adept energy providers to offer shared-service expertise in both the energy market arena and the efficient development of a long-term, responsive energy-management plan.
- All successful outsourcing relationships, regardless of the services involved are interdependent at both the strategic and tactical levels, requiring intimate interaction at many levels between provider and buyer.