Report: Cost-Obsessed Service Providers Losing Focus

Many real estate service providers assume that the primary reason why corporate users hire them is to save money. Who hasn’t been pitched the “low cost service provider” line? But a surprising new survey finds that many corporate end users don’t view cost as the deciding factor when singling out service providers.

The “Trends in Sourcing” survey, unveiled yesterday at corporate real estate association CoreNet Global’s fall conference in Orlando, also found that service providers put too much stock in competitive pricing rather than core competencies.

“Corporate end users and service providers are not on the same page when it comes to the reason for outsourcing,” says Eric Bowles, director of global research at CoreNet Global. The study polled 50 leading experts on outsourcing at Fortune 500 firms. Roughly 48% of the respondents were end users, 32% were service providers and 20% were academics or consultants.

Corporate real estate users cited cost as one of the least important factors they used in making decisions on outsourced real estate services. The respondents considered core competencies such as lease flexibility and quality service as more important than cost when choosing a service provider. End users ranked boosting core competencies 6.1 on a scale of 1 to 7 (7 being the highest priority). Two other categories — increasing flexibility and service levels — also garnered a 5.9 and 5.8 respectively from end users.

But the service providers, who were also polled in the survey, cited cost savings as among the most important factor that end users consider when choosing between service firms. Service providers ranked cost reduction 5.9 out of 7. End users, by comparison, ranked it as just 5.2. And when it comes to boosting core competencies, end users placed more weight on this category than service providers.

The report should come as a wake up call to many service providers. One reason is that most end users expect to outsource more of their real estate needs in coming years. Facilities management, lease administration and project management are three areas that corporations expect to increasingly outsource by 2010. In fact, end users (55%) expect their outsourcing needs to “increase somewhat” over the next four years.

Another finding: Roughly 32% of corporate users are starting to view their outsourcing relationships as less transactional-based, meaning one shot deals. Instead, many end users are putting a greater emphasis on partnerships and strategic alliances with their service providers. The bulk of all outsourced real estate services are still transaction-based, however. The study found that more than 30% of total expenditures for outsourced real estate functions in 2005 were for transactions such as leasing or sales deals.

“Customers want a single point of contact. That means they’ll turn to the service providers with the best size and scale to handle their needs across multiple geographies,” says Rick Bertasi, vice president and general manager of global real estate for Johnson Controls. Bertasi formerly worked for real estate services firm USI, which was bought by Johnson Controls for $80 million in 2005.

Bertasi, who addressed the CoreNet conference as part of a service provider panel on Tuesday, admits that handling a clients’ real estate needs throughout the world can be challenging. But he doubts that many global corporations can effectively handle their own real estate functions internally, so he’s not too concerned about demand drying up.

“Simply put, corporate end users are not communicating their real objectives well enough,” says Bowles of CoreNet. “And service providers are failing to understand the needs of their clients

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