Outsourcing: It's all in picking the right partner

As a master painter strokes color onto canvas, she must be wholly in tune with her subject. With each brush stroke, the subject's subtleties become more apparent, which, if the painter is patient and intuitive, will make the likeness true to life.

Although executing corporate real estate may not be considered an art form, finding a real estate service provider that will study and reflect on its customers' nuances certainly could be. With added pressure placed on corporate America to increase profits and reduce overhead, it is increasingly sensitive to real estate deals that thin the bottom line.

In cases where real estate becomes an albatross for a corporation, pressure to find quick, inexpensive solutions becomes even more intense. According to Stephen D. Scruggs, president of the corporate services group for Northbrook, Ill.-based Grubb & Ellis, anything that detracts from a company's main products and services palette is subject to intense scrutiny.

"The fundamental effect is that there is still real downsizing pressure on all corporate staffs, including real estate, even though the economy is relatively buoyant," he says. "American corporations are very sensitive to staff sizes and costs in general, so anything that's not part of their core business is under constant pressure to do more for less."

Flexing the bottom line Many of the nation's and the world's top corporate real estate representatives acknowledge that the real estate function is no longer just an operational afterthought - top-level executives are becoming more and more involved. Is more emphasis being placed on real estate as a silent partner to companies' fiscal success?

"Most definitely," says Michael Baumann, vice president for Prudential Real Estate Services, Newark, N.J. "Corporate real estate departments today are not looked at as an overhead item. For nearly all of the large companies, the real estate function has a more direct line to the boardroom, and the asset is managed more actively."

As a direct correlation to cost, Baumann notes that flexibility in today's competitive climate is essential. "You'll find that there are very few owned assets that are static or that have long term leases, because real estate is no longer something that is just lived with," he explains. "We always are under expense pressures, and flexibility is very important. In many cases we find that the senior management is far more willing to accept a higher cost if they can have greater flexibility."

"It's been a time for us of rightsizing and building flexibility into our company," agrees Matthew Cullen, general manager for the enterprise activities group of Detroit-based General Motors Corp. Cullen adds that corporate real estate practice must embody thoughtful decision making.

"As a result, we're getting leaner. We've disposed a significant amount of property and replaced it with smaller, more flexible facilities. I think that's sort of a trend from a corporate and business standpoint, which has reflected itself in our real estate requirements."

As companies rightsize for a lean 21st century, more attention is being paid to how real estate should follow the same stringent cost controls as other areas of the company. According to Scruggs, analysis of real estate holdings must occur early in due process.

"They do depreciated cost automatically on their properties, but corporations don't often look to see what the market value is vs. book value until it's time to sell an asset," he says. "And the accountants are now saying that they have to do that on an annual basis because companies are not allowed to carry an asset above its market value. These are issues that are new to the real estate community, both to the corporate real estate executives and service providers."

If real estate executives learn more about finance, they become more essential to the overall process. According to Larry Kimbler, executive vice president of The Staubach Co., Dallas, the history of a one-dimensional real estate function is going by the boards.

"Companies are looking at their balance sheets in a much more complex way," he says. Paying more attention to the process "opens up both the opportunity and the obligation for corporate real estate departments to be much more important and have a lot more impact on the bottom line."

"It's no longer enough to just say, "I've got a great rent deal,' "adds Trex Morris, national real estate director for Ernst & Young LLP. "Amortization, depreciation schedules, facilities maintenance - all of those issues get wrapped up in evaluating sites, and that's what we get measured on."

Rewarding trust with quality service Enter the real estate service providers, which are constantly challenged to re-evaluate the appropriate services, and treat the real estate function as something much more than a line item. Scruggs has noticed a significant trend toward forging truer relationships between corporation and service provider.

"We're seeing a trend toward more openness and intimacy, if I may use those words, in the relationships between the providers and the clients," he comments. "But I think a deeper level of trust is a better way of putting it. Frankly, I'd like to see more progress on that point. That's the only way we can continue to add value and to help them look good in the eyes of their organization.

"There is still some reluctance to be too open to service providers -- the old fear of the broker causing you to spend money you wouldn't otherwise do," he continues. "Those attitudes die slowly. We're most effective in an environment where the client is open to its service provider and shares its business plan and strategies freely."

As a product of a number of mergers over the past five or six years, Dallas-based Atmos Energy Corp. has worked hard to streamline operations and absorb excess real estate. According to Tom Hawkins, Atmos Energy Corp.'s vice president of budgeting and planning, successive corporate acquisitions left the company in need of an industry expert -- both in disposition and future strategy.

"We've made a conscious decision not to have real estate as a core competency inside our organization," he explains. "Perhaps this is a trend in the industry, but it makes more sense to have somebody advise you week to week so as to know the best moves to make. Grubb & Ellis came in and wanted to hear how we were going to operate our business into the future and wanted to listen to our operational strategy because it put them in a much better position to advise us."

"There really is a big difference in a partnering relationship," says Morris. "I believe service providers can bring a lot of skill to the table and give us a whole lot more flexibility. When I have a tremendous crunch time like I'm having now, I can go grab additional resources and they automatically know what we're trying to get accomplished."

Although those resources are assets to a company without internal means, reaching out to a service provider is not without risks. On the risk/reward continuum designed by The Staubach Co., companies will not glean the broader picture if responsibilities are doled out job by job.

"The model depicts the spectrum of the traditional way of doing business where you hire a service provider to do a task - relocation, acquisition or development," says Kimbler. "If you're hiring them just to do one task, then by definition they're going to focus on that task.

"But as you move up that spectrum away from the traditional one-off transaction past an exclusive provider relationship up to a strategic alliance, then you're giving long-term perspective to the service provider so they can start thinking out of the box. In that equation, the provider is not just thinking about this one transaction, but rather how the whole plan will look five years from now."

Kimbler adds that striking a customized balance between risk and reward will help each corporation maximize its real estate model. "It's about enjoying the benefits of innovative thinking while keeping risk under control," he says. "As corporations open up their kimonos to the providers, they're getting more involved with them and taking risks. It is important to mitigate those risks so companies can be rewarded without having the risks get out of line."

"I think you need to share information openly," adds Cullen, joking that breach of trust brings severe consequences. "You need to do it in the right context, and the service providers need to understand that if there's a violation of trust that, well, you'll kill them. There can't be any ambiguity as to what you expect out of the relationship."

Setting sites on the future While features and creature comforts of corporate facilities always factor into site selection, corporations are digging deeper than ever to uncover the right building in a tight location with the best amenities possible.

Baumann notes that drawing from the correct employee pool is critical to the success of the building.

"We focus very much on the demographics," he says, adding that certain formats require different criteria. "If you're opening a call center, the profile of the potential employees is very different than if you were opening a securities office. We try to put buildings in areas that are favorable and put us at an advantage demographically. So location also is very important."

Scruggs agrees, noting that demographics are more important to certain firms - high-tech companies in particular - whose employees must match a certain standard. To execute this type of search properly, he says, a company's human resources department is becoming more essential in the site-selection process.

If a corporation can draw and hire from a sophisticated talent pool, it also is more likely to gain better facilities usage from amenities on down to general telecommunications. Kimbler stresses the importance of designing a building as a tool that addresses the company's core needs.

"As it relates to the building itself, the functionality we consider to be a very high priority," he says, "because it is nothing more than a tool. If the facility doesn't fit the productivity that's going to occur in that building, it doesn't matter what it costs. It won't be a bargain, because the costs of labor may be 10 to 15 times the rent. If you've got people in a very cheap but very inefficient building, you're going to be wasting manpower."

Certainly, no service provider/corporate real estate department relationship is a perfect masterpiece. Each relationship requires time and maintenance to succeed. Baumann suggests that, to give the relationship better chances for longevity, an alliance structure can motivate providers to roll up their sleeves and get fully attuned.

"By having strategic alliances with service providers, they're guaranteed a great deal of income from a company like Prudential where they can count on our business," he says. "Therefore, our costs are lowered. The cost per transaction for us is considerably lower than they would be if we were going out and choosing service providers ad hoc."

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