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Wake-Up Call for Service Providers

When Procter & Gamble attempted to outsource all of its support functions to a single provider, few companies were up to the task. One seemed to fit the bill, however, and in 2002 P&G went through extensive negotiations that would have made Plano, Texas-based Electronic Data Systems Corp. the corporation's global provider for everything from real estate and technology to food service.

But when the Enron backlash cast disfavor on mega-deals, P&G decided against a single contract and instead hired a handful of specialized providers: Hewlett-Packard for information technology and accounting, IBM for human resources and Jones Lang LaSalle for real estate management.

The move by corporations such as P&G to seek a single service provider will only accelerate in the years to come, according to new research compiled by CoreNet Global, an international coalition of corporate real estate professionals and service providers.

“Corporate Real Estate 2010: Enabling Work in a Networked World,” projects how business trends will change corporate real estate by the year 2010. Executives from 125 corporations, government agencies and service firms conducted the research using case studies and more than 300 responses to a Gallup survey of real estate professionals at corporations around the world.

“It's about the changing role of a corporate real estate executive from providing real estate assets to providing whatever integrated resources are necessary to enable work,” says Barbara Hampton, CoreNet's program manager for the 2010 project.

CoreNet 2010 suggests others will pick up where P&G and EDS left off with integrated services. An example is Sun Microsystems' iWork Solutions Group, a departmental hybrid that blends real estate planning with elements of information technology and human resources to devise cost-saving efficiencies. And in 2010, efficiency will be the name of the game.

Central to CoreNet's findings is the emergence of globally networked enterprises, which extend beyond a corporation to include its investors, vendors, customers and even governments. Web-based communications enable these networks to expedite development, production and delivery of goods and services.

Researchers concluded that competition among these enterprises will drive efficiency and cost control to new heights. The corporation that has eliminated redundancy and boosted efficiency in its core business is already applying similar measures to wring out costs from the back-office functions of human resources, information technology and real estate.

According to CoreNet, executives in 2010 will be asked to create business plans that combine all business processes to enhance worker productivity and offer competitive advantages for the corporation. In fact, business strategy may be the only thing many real estate executives do.

CoreNet envisions executives becoming too absorbed with planning and coordinating a spectrum of resources to handle service delivery, so day-to-day work will go to service firms.

“(Executives) will not be involved in the actual negotiation for space, the actual site search process,” predicts William Braun, a CoreNet research team leader and an account director in global corporate services at Cushman & Wakefield's Chicago office.

Holistic Service Provision

The changing nature of how and where people work is transforming corporate real estate. While only 16% of survey respondents reported their employees currently work outside assigned offices at least a quarter of their working hours, nearly 40% expect their knowledge workers to work remotely by 2010. Knowledge workers are those who contribute intellectually to a business rather than manually.

Growing reliance on knowledge workers and the technological ability for those workers to do their jobs almost anywhere has spurred major employers like Sun Microsystems to rethink the role of real estate in providing a place for work. “Probably on the order of 70% of our workforce would be better served with an infrastructure that supports their mobility,” says Eric Richert, vice president of Sun's iWork Solutions Group. “We needed to help people be productive on the move.”

Sun is the world's largest manufacturer of UNIX-based servers to run company networks and Web sites. In the 1990s, when heavy traffic in the San Francisco Bay area made commuting difficult for many Sun employees, iWork developed technology that enabled employees to work from any of its four Bay-area campuses. Eventually the program grew to include suburban “drop-in centers” offering work kiosks, and today employees simply log in at any Sun facility. Incoming phone calls are routed to the employee's temporary workstation.

Thanks to iWork's office-sharing system, Sun only needs one workstation per 1.5 employees and has already eliminated 7,000 workstations. That's a reduction of about 1 million sq. ft., says Sun spokesperson Debbie Walery. “We've been able to avoid $71 million in excess real estate costs in the last year,” she says.

The iWork Solutions Group combines elements of real estate and IT to ensure that employees have the proper resources to do their jobs. The group also monitors employee productivity and job satisfaction, traditionally the purview of a human resources department. CoreNet predicts this sort of cross-disciplinary approach will become more common among corporations and their service providers by 2010.

“Both the corporate real estate executive and the service provider need to take a more holistic approach,” says Cushman's Braun. “It's not just about products and services; it's about creating business solutions.”

A New Breed of Executives

Pressure to improve support services is raising the bar for real estate executives and service providers alike. “People in all aspects of the business will become much more intelligent about customers, resources and the ability to use higher efficiencies to improve margins,” says CRESA Partners founder Candice Fitzpatrick, who led the CoreNet research team on portfolio management.

Real estate executives in 2010, the study found, must work in concert with human relations and technology experts to provide coordinated services that cut costs and boost margins. More than real estate know-how, executives will need skills in finance and general business strategy.

The CoreNet team studying leadership trends suggests that the shift away from traditional real estate tasks will be accompanied by an increased need for what team leader George Bouris calls “enterprise skills,” including customer relationship management, overall business strategy and an ability to motivate others in support of new initiatives.

Bouris, who is practice leader for corporate real estate operations and systems consulting at Deloitte Consulting in San Francisco, says the general expertise required means many corporate real estate executives in the future won't come from a real estate background. “It will be much easier to shift from being a traditional business executive to a corporate real estate executive than the other way around,” he says.

Challenge to Providers

While CoreNet's research focused on the corporation side of the equation, the findings suggest changes are in store for service firms as well. Mary Pat Rick, a senior marketing analyst at Johnson Controls in Milwaukee, says P&G's groundbreaking negotiation with EDS sends a message that corporations will soon expect a wider scope of services than they currently receive. “By 2010 there are going to be external service providers who do evolve to provide all business process outsourcing,” Rick says.

Deloitte's Bouris says corporations in 2010 will expect service providers to understand finance and process management, and to craft strategies that boost profits. “You're going to have less deal junkies and more sophisticated real estate advisory groups,” he says.

Bouris predicts a new form of service integrator will bridge the growing gap between internally focused executives and service providers. Whether existing providers expand to fill that need or new companies step in, the integrator will execute action plans using other service providers to carry out ground-level work.

Researchers say service firms can become more attractive to corporate clients by developing capabilities corporations need to control costs. Those skill sets may include expertise in foreign markets, corporate finance or supply chain management.

Karen Ellzey, director of consulting services at Trammell Crow Co. and leader of the CoreNet 2010 research team on integrating business resources, says corporations need flexibility and speed, but real estate isn't known for either of those traits. Ellzey says typical lease terms that commit a tenant for five to 10 years frequently are not a good match for the 12- to 18-month windows many corporations use to evaluate their business strategies.

Real-Life Applications

A recent Bank of America deal that Trammell Crow helped structure with American Financial Realty Trust (AFRT) is an example of how providers can offer flexibility, Ellzey says. Bank of America sold 8.1 million sq. ft. to AFRT, a publicly traded real estate investment trust (REIT), and leased back 5.2 million sq. ft. The bank can now expand, contract or trade space in any of AFRT's 600 other properties under prearranged pricing.

The move relieved Bank of America of administrative duties for 450 third-party tenants that had leased space in its buildings; those leases transferred to AFRT as landlord. The deal also gave AFRT the opportunity to lease 9.5 million sq. ft. of vacant space to new users. By bringing its occupancy costs in line with current needs and fixing costs for future changes, Bank of America estimates the arrangement will save $420 million over its 20-year term.

Nicholas Schorsch, president and CEO of AFRT, says the REIT is able to offer flexibility because it deals exclusively in bank properties and has a portfolio large enough to provide space anywhere Bank of America might want to go. The REIT benefits with a guaranteed tenant in a specific volume of space, even if the bank shifts around within AFRT's portfolio.

Preparing for the Future

Some commercial real estate firms say they are expanding their expertise now to serve the corporation of the future. Thomas Bomba, executive vice president with Jones Lang LaSalle, emphasizes that understanding the political, cultural, religious and legal factors affecting clients in foreign markets takes an extensive network of agents.

Bomba, who led a CoreNet team studying corporate site selection in a networked world, says he doesn't think any service provider offers an extensive depth of understanding in every market. But Jones Lang LaSalle, he says, is expanding its capabilities to help clients evaluate options around the globe.

Ryon Paton, executive managing director at CB Richard Ellis in Foster City, Calif., says CBRE's role has expanded from an executor of real estate tasks to a business strategist that consults its clients on operating issues. One of the ways CBRE has deepened its bench strength is through internal industry groups in which account representatives share information to help clients find new opportunities.

“Our clients are telling us that they want both,” Paton says. “They don't just want better intelligence, they want someone who can tie that intelligence to a local market and fulfill a strategy.”

Matt Hudgins is an Austin-based writer.

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