Retail Traffic

Why Outsourcing Is So Valued

Although outsourcing of property management duties was a novel idea just a decade ago, the concept has evolved from the original mom-and-pop vendors to huge nationwide conglomerates that offer one-stop shopping for an array of services.

When Bettina Browne raised $55 million to found Omni Facility Resources in 1988 in South Plainfield, N. J., outsourcing for shopping centers was still being met with skepticism. She developed the concept that became Omni after realizing "customers were looking for a single source for a wide variety of services." She is now president and CEO of a company that employs 5,500 people and has offices in 30 states.

"The marketplace was looking for that one-source provider," agrees Chad MacDonald, who looked to Wall Street for help in launching the publicly traded Building One Services Corp. of Dulles, Va., in late 1997.

With 17 years of experience in the retail property management business, MacDonald now is president and chief executive of Building One. The company has 15,000 employees across the country and annual revenues of about $1.8 billion. Clients include PetsMart, Food4Less, Toys 'R' Us, Target and Kmart.

Another company, SSC Service Solutions, which was founded in 1969 to offer cleaning services, has since evolved to keep up with changing times. Today it's a national company with 9,000 employees and responsibility for 200 shopping centers in 35 states, says Mike Gonzalez, director of marketing for the shopping center division of the Knoxville-based firm.

Back to basics One big advantage of outsourcing is that it allows retailers and shopping centers to concentrate on their "core competencies," according to Browne. "Their business is to lease space, not do landscaping," she says. "Outsourcing allows owners to focus on their core business and let the ancillary services be provided by a third party."

Those services - many of which traditionally have been done in-house - include everything from maintenance, electrical, mechanical, heating and air-conditioning, and landscaping services to safety and sanitation issues, snow and graffiti removal, display setup, and specialties such as the care of wood and marble.

Proponents of outsourcing tout the benefits of having one point of contact and only one invoice instead of dozens from various vendors.

Paradigm shift A decade ago, most of these tasks were done by in-house staff, but "after all these years, owners have found that maybe it's best not to do everything," Gonzalez says. "They found they needed to get back to their core business - that's the current buzz phrase - of focusing on providing the ultimate quality and customer service."

In the mid-1990s, a trend Browne refers to as "vendor reduction" became apparent. "They (shopping center owners) realized they had tremendous buying power and could leverage that by finding a single-source provider," she says. "Now it's just taken off, the same way outsourcing was a few years ago."

The concept also is known as outsourcing "bundled" services. Gonzalez sees the market trend toward more outsourcing of bundled services continuing indefinitely. "People have outsourced housekeeping for a long time, but the bundling of overall facility operations to a single source is relatively new. It's still in the infancy stage."

In the past, each local manager handled property management duties, either in-house or outsourcing to various vendors.

"Everything was left up to the discretion of the local or regional manager, and then corporations realized they were squandering their buying power," Browne says. "So they began looking to sole-source vendors across their entire portfolio."

Wall Street's influence It's no coincidence the trend has coincided with the growth of REITs and their acquisition of shopping centers, says Browne, who anticipates another five years in the vendor reduction phase. As owners have focused more on profitability, especially in light of the REITs' recent stock market struggles, outsourcing has given centers a chance to go back to their core business, MacDonald notes.

During a recession in the early 1990s, outsourcing increased in popularity as owners cut costs, a trend Browne thought would reverse when the economy improved, but she was wrong.

"I thought outsourcing would slow down when the economy picked up, but that didn't happen," she says. "There is a greater demand now by shareholders for greater profitability. By leveraging their buying power, outsourcing is a relatively easy way to increase profitability."

Economies of scale also extend to the purchase of supplies, which a national property management company can order in massive quantities, MacDonald notes. "If you've got hundreds of properties, you can aggregate those line items together and take advantage of significant buying power," he says.

The same goes for services. Simon Property Group, for example, recently became the first national retail REIT to outsource the energy management needs of its entire portfolio, which includes 253 retail and mixed-use properties. Simon now spends about $150 million a year on energy. But the Indianapolis-based company hopes to dramatically reduce that figure through a 10-year, $1.5 billion outsourcing agreement with Enron Energy Services.

In October, Simon announced that Enron will supply or manage natural gas, electrical and other energy needs at all Simon properties. Enron's duties will include maintaining lighting and energy conversion equipment and upgrading or replacing heating, ventilation and air-conditioning systems.

Simon also maintains a preferred outsourcing list of more than 50 vendors called the Merchant Resource Network. The program enables Simon's tenants to receive a wide variety of products and services at a competitive price. "We are reinforcing our focus on our core business," says CEO David Simon.

Move toward consolidation Building One Services has continued to grow through aggressive acquisitions of smaller property management companies, according to MacDonald. "The industry as a whole was very fragmented," he says. "There were a lot of mom-and-pop operations. As a result, opportunities for consolidation existed."

After strategically acquiring 47 companies in certain geographic areas or with specific specialties, Building One has blanketed the country's top 100 retail markets, and MacDonald says "the pipeline for potential acquisitions is still robust."

Maintenance and safety concerns also have become much more critical in recent years, according to MacDonald. "When you're dealing with the public, clean, safe and functional environments are crucial.

"The awareness of unsanitary conditions and their relation to communicable diseases has been heightened," he says. "Owners are paying more attention to cleanliness and property maintenance."

The growing sophistication of retail management also has contributed to the increase in outsourcing's popularity. With outsourcing, a retailer can have access to an array of professionally trained and licensed vendors without having them on the payroll, as well as the capability to produce the extensive reports required by owners.

"One of the biggest factors in controlling costs is labor," says Gonzalez of SSC, which is a privately owned employee-held company. "The cost of (employees) is increasing daily. And the marketplace does not lend itself to readily available and skilled personnel. It is difficult not only to find but to retain labor these days. There also is the expense of salaries and benefits."

With the advent of utility deregulation, Building One is investigating how it can harness buying power to provide electricity to its clients, McDonald says. "That's another huge opportunity."

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