For nearly all companies in all industries, salaries are the single largest expense. But in most cases, real estate and facility management expenses are a close second. So in the current economy, an increasing number of corporations are turning to a different way to manage their corporate real estate in order to rapidly shed costs.
At a basic level, outsourcing involves the decision to replace the internal provision of services with external service providers. In the commercial real estate industry, outsourcing is not necessarily a new trend; it’s more of a growing one. More and more companies are outsourcing non-core functions – like real estate – in an effort to continue performing while eliminating expenses.
Approximately 10 percent of corporations in the U.S. currently outsource all of their commercial real estate functions, and that number is steadily increasing. Companies today are realizing the benefits of outsourcing services including transaction management, property management, project management, facility management and lease administration.
Let’s face it. Economic uncertainty still shadows the commercial real estate environment. But where there is uncertainty there is usually opportunity for corporations to take advantage.
We are seeing different industries at different stages of the outsourcing evolution. Industries where margins are tight and cost cutting is necessary have seen how much they can save and already have gone through the process. Others are just catching on to the idea.
Studies have shown that commercial real estate outsourcing can provide 10 percent to 20 percent occupancy cost savings.
SunTrust Banks, Inc., is a good example of the outsourcing value. As one of the nation’s largest banking organizations with total assets around $178 billion, it recently made the switch to outsourced real estate functions. The outsourced corporate real estate services will include transaction management, project management, lease administration and portfolio planning for SunTrust’s office facilities and branches. Atlanta Business Chronicle reported that the outsourcing decision is expected to save SunTrust between $60 and $70 million a year for the next five years.
The reality is that outsourcing – when done strategically and methodically - reduces bottom-line expenditures. Flexibility by better aligning the real estate portfolio and corporate objectives is another major benefit.
Capacity and Capability
Until recently, most companies have been outsourcing only their tactical services and keeping strategic capabilities in house. But over the last few years, the top service providers are moving up the value chain by providing more strategic services to their clients, like portfolio strategy, M&A due diligence, integration, cost cutting strategies and workplace strategy.
It’s much more important for real estate services companies to help clients focus on their capability and expertise rather than just expanding their capacity without set goals. The best occupier servicers are actually helping their clients solve business problems (cutting cost, increasing margins, better productivity, etc.) utilizing real estate tools.
Factors Affecting Outsourcing
Outsourcing at its most basic is a change management process. Before an organization can move forward with outsourcing, the mandate must come from the top of the organization, where proper governance can be given to the outsourcing initiative and ensure it’s aligned with the overall corporate objectives.
There are a number of factors that companies need to keep in mind in today’s marketplace. For one, the world is becoming increasingly “flat,” and commercial real estate departments are becoming more globally centralized. The issue that stems from this is that international real estate customs are much different than those in the U.S. An experienced real estate organization with international experience is a must.
It’s also important for best-in-class organizations to integrate their key corporate support functions, including commercial real estate, IT, legal, purchasing and finance, to increase efficiency. With this step, companies can more easily predict future demand for commercial real estate to create more financial flexibility.
During the digital age, companies also need to keep up with new technology tools to manage real estate. The increased adoption of tools such as lease administration and space management is gaining traction very quickly. The integration of these real estate tools and the corporate accounting and other ERP systems is critical.
There is definitely an “upskilling” taking place within the Corporate Real Executive (“CRE”) suite. The job is becoming less tactical and more strategic. Best-in-class real estate portfolios are connected very tightly with the finance department and its goals and objectives.
Chris White is the Senior Managing Director and Principal of Cassidy Turley’s Atlanta office. He has been involved in managing several Fortune 1000 Companies’ real estate portfolios in the US and Worldwide.