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Maturing outsourcing business looks ahead to strategic services

Real estate outsourcing is not the same game it used to be. In recent years, it has bloomed into a thriving business affecting all aspects of the real estate industry. The relationships between client and provider have changed and now, as alliances are formed, everyone's a winner.

When Scott G. McNealy, president of Sun Microsystems Inc., a $6 billion computer giant, wakes up every morning, he probably thinks about networking solutions for his international clients, not the 5.5 million sq. ft. of real estate his firm occupies. But when John Wallerius, president of LaSalle Partners, a Chicago-based real estate services company, starts his day, he thinks about facility solutions for the Palo Alto, Calif.-based technology firm.

"Sun Microsystems will never be an industry leader in project and facilities management," says Wallerius, whose firm provides a range of transactional and strategic services to the computer firm in what many consider to be a leading-edge real estate services alliance.

This simple scenario summarizes why real estate outsourcing has mushroomed into a thriving business that, by most accounts, will continue to grow in the next few years. The growth will include contracts that cover a broader scope of services, with more strategic planning services joining the mix of transactions, for major corporations as well as medium-sized companies and public-sector organizations.

While outsourcing has been a trend that's influenced business functions like data processing, administration and key component manufacturing for decades, it became part of a corporate real estate executive's tool-kit a scant five years ago. Now, these executives and service providers are drawing on those experiences and trying to optimize their outsourcing relationships.

"Companies that have piloted or integrated some outsourcing are definitely expanding relationships with existing providers or new providers," says Paul Uber, senior vice president of COMPASS Management and Leasing, the Atlanta-based subsidiary of Equitable Real Estate Investment Management Inc.

More and more corporations are stretching beyond the typical property and lease management, design/build, janitorial and maintenance services and seeking or considering deals with services like space planning, site selection and, most importantly, overall strategic planning.

"We continue to see good demand for real estate services, and clients are more interested in researching the benefits that a strategic alliance can bring," says Bill Concannon, president and CEO of Stamford, Conn.-based Trammell Crow Corporate Services, a six-year-old spin-off from Trammell Crow Co. that employs 400 people and manages more than 9,000 assets in North America.

GTE Services Corp., a Stamford-based communications firm that spends about $1 billion a year in occupancy costs, has outsourced higher-end services to its strategic partners in the last year. "It's easy to outsource the transactions," says Ron Kulpinski, vice president of corporate real estate, "but, as resources become further restricted and corporations develop models on how to use service providers, it becomes easier to hand off strategic issues. We find ourselves deferring higher-end activities to our alliance partners."

But some are not as sanguine about the overall market. A study on corporate real estate trends produced by Wilton, Conn.-based Deloitte & Touche and NACORE, West Palm Beach, Fla., admitted that outsourcing is an "especially perplexing" issue in large part because of ambiguous performance evaluation. There's anecdotal evidence of some corporations taking real estate work back in-house. "Many of outsourcing's shortcomings are not well-documented, because nobody wants to trumpet their failures," says one consultant, "but there have to be failures out there."

"You may see some companies turning back outsourcing," counters Mike Miller, executive director in the Los Angeles office of CB/Madison Advisory Group, "but, among the bulk of Corporate America, outsourcing has gained acceptance. It ultimately comes down to the strategic value of a corporation's real estate."

The need for strategic services depends, in part, on the type of business a corporation ration runs. Automotive, banking, computer and telecommunication industries, for instance, need strategic help, because they are under intense competition and are focusing on their core businesses. "Any industry that's undergoing change is looking at ways to re-organize," says Michael R. Carroll, a principal of CORE Resource Inc., and Auburn Hills, Mich.-based real estate company formed by former real estate executives of Vorelco Inc., the real estate division of Volkswagen of America. "Real estate is never going to be part of the core group."

Why outsource?

There are several compelling reasons for the growth in outsourcing. In response to growing domestic and foreign competition, firms in all industries are focusing on their core businesses. Units that are not part of the core business are being eliminated or reduced, cutting overhead and increasing the bottom line. The goals are higher profits and a competitive industry edge.

Outsourcing also helps corporations react swiftly to market opportunities. With corporate success increasingly measured in quarters, not years, and business cycles more compressed than in the past, corporations are relying on service providers to seize opportunities quickly without extraordinary start-up costs and burdensome overhead. Besides, there isn't much excess manpower capacity in many corporate real estate departments since many firms have already downsized. Half of the companies surveyed by Deloitte & Touche and NACORE have five or less real estate staffers today.

"Strategic alliance models continue to work well because of the flexibility they offer," says Andy Bessette, national director of field leasing and facilities management at Hartford, Conn.-based Travelers Indemnity Co., which started outsourcing after cutting its real estate staff by 75% in 1992. The firm owns and leases 9 million sq. ft.

Technology is another primary reason corporations outsource. Until the 1990s, real estate executives virtually ignored the technology revolution, but their strategic real estate partners quickly put corporations on the leading edge of computer software and networking.

"Corporate real estate departments are looking for more tools, because they can only work so hard for so long with so few," says Peter Santora, a principal in the Los Angeles office of Arthur Andersen Real Estate Services Group. "They are finding that they need a better way to capture information and a more efficient way to respond to senior management's requests and expectations."

Creating process, not transactions

Corporations are always looking at how they do business. If something doesn't add value to corporation's mission, it is being outsourced to another organization in a seamless fashion. But outsourcing has more to do with process and work-flow than real estate or any other function. And the ultimate value of the in-house corporate real estate executives is determining the best business practices for internal staff and service providers.

"If a corporation retains a real estate staff, the real value is not grinding out the best deal in the marketplace," says CB/Madison's Miller, "it's paying attention to strategic factors, deciding on the process and monitoring its consistency."

H. Bruce Russell, who is director and vice president of corporate real estate at Eastman-Kodak Co., Rochester, N.Y., makes the strategic real estate decisions and relies on his alliance partners to execute the plan. For instance, instead of sending staff members to interview and select a broker to negotiate field office leases around the country, Kodak has contracted with CB/Madison Advisory Group to provide these services nationally. "They can do the work more efficiently," he says. "We can do more with far less (personnel and expense)."

When GTE Services Corp. cut its staff from 35 to 11 two years ago, it started alliances with Cushman & Wakefield, New York, and Dallas-based Staubach Cos. to help oversee its 55 million sq. ft. portfolio. Cushman & Wakefield and Staubach perform property acquisition and disposition, lease administration and property management.

To more effectively communicate and manage the process, corporations are consolidating outsourcing work with fewer service providers. For instance, McLean, Va.-based Northern Telecom Ltd., which leases and owns 20 million sq. ft. in North America, uses one firm for its U.S. real estate needs, Dallas-based Fischer & Co., and one for its Canadian requirements, Toronto-based J.J. Barnicke. The additional advantage to fewer alliances is that the vital education about a corporation's process and goals doesn't have to be repeated, which can be a costly endeavor, and the data interchange and reporting requirements are easier to coordinate.

"We see ourselves as internal consultants who can make the best decision for our business," says Roy Dohner, Northern Telecom's vice president of real estate. "The better we define and are able to articulate our needs, the better the chances of meeting our goals are. The service provider doesn't get you better terms, the process does," he adds.

In addition to a clear vision and direction of a corporation's real estate portfolio, which must originate from the corporation, successful alliances also hinge on the ability to change the process to get the best results, Russell says. "We are constantly looking at everything we do and deciding if it is most effective," he says. "This mindset drove us to where we are today."

Difficult measurements

While performance measures are written into contracts, assessing the results of management contracts is one area in which the industry struggles. But leading-edge companies are looking at gauging the results of outsourcing more effectively and with more standard measurements, which could help ensure its place in the real estate business.

Cutting overhead remains a prime motivation of outsourcing, but the quality of service is becoming the over-riding factor. "We have to do the work better and faster as well as cheaper," says Raymond Bayley, managing director of Chicago-based Stein & Co., which is negotiating an outsourcing contract with a $30 billion company that, Bayley says, is worried less about cost and more about adhering to a larger corporate initiative of staying competitive in its industry.

The Deloitte & Touche/NACORE study supports the claim that the real benefit may be better service. More than two-thirds of corporate executives surveyed said service quality improved with outsourcing while just 51% said significant savings accrued. "The reasons for outsourcing have changed," says Mark McLaughlin, senior vice president of Boston-based Colliers International. "There's a shift from price to quality of service."

But service often is difficult to quantify. Meanwhile, others say flexibility supersedes reduction. "A contract that's cost conscious but not flexible is useless to a corporation," says one service provider. But flexibility also is difficult to measure.

Measuring results could be a trump card for the future of real estate outsourcing. The measurements that corporations do try to use include goals for space standards per employee and build-out, consolidations and relocations, lease audits and property tax appeals. Benchmarking continues to grow as a performance option. But, for benchmarking to work effectively, participants must define and agree on performance measures and exchange information.

Besides weak quantification, some other negatives of outsourcing can be just as visceral as the benefits. Control and trust are among the critical cultural issues with which corporations may struggle, but perhaps the most dramatic problem is effectively sharing information. "If a company is not willing to share internal information with a service provider, then the likelihood of a successful alliance drops dramatically," says Joel Parker, director of research at the Industrial Development Research Council (IDRC), a Norcross, Ga.-based trade group for corporate real estate executives.

Despite the lack of measurement and the potential for communication gaffes, most corporations appear to be satisfied with their alliances with real estate service providers. And some are experimenting with strategic, high-level services. For instance, Cushman & Wakefield Inc. recently expanded a contract with a telecommunications company to provide strategic planning and administrative functions. The New York-based real estate firm also is about to sign a deal with a Silicon Valley-based software firm called Informix that will include a full range of strategic and transactional services.

"This is a prototype of the kind of alliances you might see more of in the future," says Cushman & Wakefield's executive managing director of corporate services, O.B. Upton Ill, who likens the agreement to the one that LaSalle Partners has with Sun Microsystems. "Clearly, the past success of the early outsourcing relationships is contributing to the growth of the business."

Ameritech, the Midwest Baby Bell, outsourced the property management of its 48 million sq. ft. portfolio two years ago. Today, a joint venture between LaSalle Partners, Stein & Co. and Milwaukee-based Johnson Controls not only manages facilities and construction but participates in strategic planning and real estate budgeting. The three firms formed a venture called ASC Services Co. L.L.C., which is located one block from Ameritech's downtown Chicago headquarters, to service the phone company's portfolio. ASC Services totals 170 employees, with many of the design and construction staff hired directly from the Baby Bell.

As demand for global real estate services grows among U.S. and foreign-based companies, American real estate companies will benefit, since they are considered to be more effective at dealing with a breadth of real estate issues.

Sven Pole, an associate of The McMahan Group, a San Francisco-based management consulting firm, says public pension funds may outsource the entire administration of their real estate investment programs like they have done with their stock and bond trading. Pacific Gas & Electric and Milwaukee Retirement System have outsourced their real estate equity portfolios. These so-called "managers of managers" would develop research and performance measures, select consulting firms and understand the strategy of investment managers.

For now, the growth in outsourcing will come from Fortune 500 firms as well as a growing number of medium-sized companies and public entities. "The base of business is broadening horizontally now," says Arnie Susorney, executive director of CB/Madison Advisory Group. "Second- and third-tier companies are trying to structure outsourcing relationships."

As Corporate America re-organizes itself, outsourcing of noncore business functions will continue to be viewed as strategy that optimizes resources.

"Outsourcing is not a trend de jour," concludes Bayley. "It's a better way to do business."

And anything that maximizes value is welcome.

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