Driving portfolio performance: management costs or costs managed?
Too often companies, in an attempt to drive portfolio performance, tend to focus on management costs, neglecting that the real driver of portfolio performance is costs managed.
This is particularly relevant for organisations embarking on an outsourcing strategy driven by procurement personnel. However, to drive portfolio performance, using both internal and external expertise, the key to success is understanding the different impacts that management costs and costs managed ultimately contribute to the portfolio total costs of occupancy (TCO).
Total costs of occupancy
To be meaningful, portfolio performance management should be based on the TCO. This concept works as the measure used to determine the true cost of the physical premises used to conduct operations and how costs impact business performance for both leased and owned portfolios of occupied facilities.
The TCO measure covers all ‘cost-of-use’ categories that can be attributed to the use and operations of the premises including:
- management costs
- rental and outgoing cost recoveries paid for leased properties
- capital use charges to recognise the occupancy of owned assets
- direct user occupancy costs including cleaning, security etc
- general maintenance including reactive, planned and preventative
- energy and utility costs
- depreciation costs for fitout and refurbishment project works
- churn costs supporting ongoing workplace changes
- amortisation for make-good cost provisions at lease termination
- relocation costs including legals, moving etc, and
- professional fees related to accommodation decisions.
Using the TCO approach provides consistency, no matter whether properties are owned or leased. As the standard benchmark, TCO should be used for budgeting and monitoring of actual costs; variances are assessed, to test whole-of-life portfolio decisions and performance outcomes.
Management costs cover the resources and support infrastructure required to make the value-add decisions and to manage all the other costs related to the occupancy of the portfolio.
These costs also cover the resources preparing the portfolio accommodation strategies, managing internal customer relationships, ensuring that external contract and service delivery arrangements meet expectations, and support the tactical and operational decision-making related to project, property and facilities management across the portfolio.
These management resources may either be internal to the organisation or form part of the outsourced contract costs, dependent on the approach taken in determining the delivery platform for the portfolio management. Typically, these management costs average around 10 to 15 percent of the TCO dependent on the nature and complexity of the portfolio.
Costs managed are generally related to the majority of portfolio operational costs covering aspects such as rental and outgoing payments, planned and reactive maintenance, minor works, facilities ‘soft’ services, cleaning and hygiene services, utilities such as energy and water, workplace fitout amortisation and churn etc.
In addition, these costs will also likely include the cost of support management information systems, financial management and accounting, WHS (work health and safety) and compliance, services centres and ‘help desks’, subcontract procurement services and environmental controls. Typically, these costs managed usually represent in excess of 90 percent of the TCO for the portfolio.
Low weighting impact
Based on the weighting of the management costs, any savings will have a relatively small impact on the overall TCO for the portfolio. By implementing a 15 percent saving in management costs, representing only 10 percent of the overall TCO, will in effect, only represent 1.5 percent portfolio saving.
To achieve this level of cost reduction, however, significant management expertise may have to be sacrificed. Aggressively focusing on driving down management costs and under-resourcing the facilities management team will likely result in the inability to focus on real value-for-money savings in portfolio costs managed.
“To drive portfolio performance, using both internal and external expertise, the key to success is understanding the different impacts that management costs and costs managed ultimately contribute to the portfolio total costs of occupancy (TCO).
One key focus area for the facilities management team, which can make a significant difference to future portfolio costs, is in engaging with key stakeholders of the business functions occupying the premises, to understand future needs and to create relevant future portfolio plans.
With evolving workplace designs, the appropriate level of flexibility and use efficiencies that form part of the organisational culture are the real drivers of high performance teams and value outcomes.
Another aspect of management responsibilities that is often neglected is contract management. Too often outsourced property and facilities contracts are procured with a drive to secure recurrent cost savings, but once transitioned, there is little or no embedded contract management skills or practices within the client organisation.
One of the primary reasons that outsource contracts often fail to live up to expectation, in terms of customer service, delivery efficiencies and cost saving, is because client organisations do not retain appropriate internal resources with the skills to manage the contracts. A consequence of the focus on management costs reductions.
This vacuum allows service providers the opportunity to lapse into bad habits and not focus on efficiencies and cost managed savings, while they are focused on securing new contracts elsewhere.
Cost savings focus
Any savings identified in costs managed, possibly representing up to 90 percent of TCO, will obviously have a far greater impact on portfolio performance, representing value-for-money outcomes for the business functions occupying and paying for the premises through organisational charge-backs.
Examples of this inappropriate focus are numerous. Consider an outsourcing contract that includes, as part of the fixed ongoing fee, the requirement to undertake all lease renegotiations and procurements. With these types of negotiations, generally required on a sporadic basis, the rental outcome may be significantly above what it should be because of a lack of focused and skilled leasing resources.
The cost of a skilled leasing negotiator is likely to be significantly less than the value that can be achieved in a ‘tough’ professional negotiation with a landlord. For example, achieving a $7.50 per square metre rental reduction in a 10-year lease for 20,000 square metres of offices, equates to close to $2 million, so cutting the management cost of a leasing executive at a tenth of this cost is not an optimal outcome.
Other similar examples of recurrent savings that can be achieved by having focused control of costs managed include unplanned maintenance breakdowns versus planned preventative maintenance and procuring ‘unbundled’ cleaning subcontracts.
So what are the lessons learned? Too often organisations embark on poorly structured ‘cost cutting’ restructures and outsourcing projects.
Key corporate knowledge and management capacity is lost as layers of management are removed, ignoring the need to retain internal strategic portfolio planning, relationship management and contract management skills.
These skills and the related management costs are essential for planning for future accommodation needs and ensuring that outsourced contracts deliver the portfolio’s tactical and operational requirements as planned.
In addition, often in the evaluation of outsource tenders driven by ‘cost cutting’ zealots, the practical reality that may be evident in the tender submissions, is ignored.
Often it is obvious that the resources in the proposed contract management plan are not sufficient to deliver the expected property and facilities outcomes.
In the bid, it appears that internal overhead management costs have been significantly reduced and replaced by ‘unbelievable’ low outsourced contract management costs.
But soon after the contract has commenced, with reporting deadlines missed, critical lease dates neglected and critical service infrastructure ‘breakdown’, it rapidly becomes apparent that costs managed budgets are going to blow out – usually significantly in excess of the management costs saved.