Outsourcing small requirements: does it work?
RODNEY TIMM of Property Beyond questions whether outsourcing of facilities and leasing services for a small portfolio of leases has any real impact.
The scenario often plays out – a new CEO wanting to cut costs and make his mark in an organisation looks around to find sacrificial lambs. Property and facilities services are often on top of the list (‘what do these groups contribute anyway?’).
These corporate support teams are seldom appreciated for their efforts, despite being the champions of small budgets – achieving with very few dollars. Always resourceful and willing to please, they manage to oil the squeaky wheels with intuitive and innovative solutions. But, the CEO’s call is out – do the business case showing the savings by outsourcing property and facilities services.
For more mature companies that have enjoyed unrelenting growth and few efficiency drives, as things taper off there are often good reasons to do things differently and save money. But, these prospects are more challenging for smaller companies with smaller portfolios.
Consider a small service organisation with fewer than 100 leased premises across Australia and the regions.
The fitout is usually fairly basic with relatively minimal facilities service requirements. The local office manager tends to the occasional callout of the local tradesman. The main centralised facilities input – usually a low salaried junior facilities coordinator – is seen as providing procurement support for cleaning and compliance testing. The heroic after-hours support provided to branches every few years with fitout and relocation to new premises is usually forgotten.
The lease management team – usually in the form of one individual – has the arduous task of monitoring lease events and critical dates to renegotiate leases. This is a critical process in saving organisations many thousands of dollars, particularly with leases tending to have different terms, expiry dates, rent reviews and option patterns. One missed rent review notice or renewal option can cost significant additional rent for the next three to five years.
Tracking all the detail – particularly in spreadsheets – requires focus and commitment. And, astute lease negotiations are required to realise rental savings or to minimise unplanned capital costs, such as make-good. Usually, in the drive to save corporate costs, the lease manager’s salary and on-costs are the point of focus, ignoring the rental and capital costs managed.
With facilities services, the temptation is to hand over responsibility for these functions to the local office. This approach seems to be a neat solution – save the cost of centralised resources and no additional costs in the local offices.
But, this is seldom true. Without technical guidance, tradesmen’s costs start to creep up as contractors realise they are dealing with the uninitiated with limited or no facilities experience. And, managers discover they are constantly being distracted from their primary responsibilities in running the local business – productivity starts to decline and essential service requirements get neglected.
In particular, workplace health and safety (WHS) and compliance risks do not get the attention required. These are usually core functions for facilities staff who are trained and focused on the required WHS outcomes, hence reducing the risk of WHS incidents occurring.
Outsourcing to service providers can provide savings, can enable things to be done better and – as part of their service – can provide bespoke systems support with all the functionality needed to manage leases and facilities services. Helpdesks are structured to respond to occupier requests and issue works orders instantaneously as required.
But, service providers need scale to be cost-effective – resulting in smaller portfolios being managed by shared resources across clients. Although this approach is good for cost reductions, dedication to a specific client portfolio is lost. And, understanding particular business needs and the idiosyncrasies of a business is also lost. Mistakes are made and compromises start to occur – best possible leasing deals become ‘good enough’ deals.
It does well to remember that, after outsourcing, service providers need to be given direction – so within an organisation a manager will still be accountable for portfolio outcomes to provide direction and give approvals. These responsibilities are usually more intensive in managing profit-oriented service providers than skilled and motivated internal employees.
COST BENEFIT ANALYSIS
With any potential outsourcing, particularly if driven by cost saving imperatives, it is wise to undertake a cost benefit analysis to determine if there are real savings to be made.
Although cost estimates can be made, the financial reality check only occurs when market quotations for the services are obtained. In support of the financial decision, assessments of the service quality outcomes are required to determine if there are improved service delivery outcomes possible – or at least that existing service standards can be achieved.
In obtaining quotations for facilities services, it is soon evident that, even with ‘light touch’ type leased premises supported by a help desk, the costs can be significant – even if the service reporting potential is impressive. Outsourced facilities services resource costs may be prohibitive. Particularly when on-costs, corporate overheads, profit margin and GST are added to the same salary that was being paid to the internal facilities coordinator.
For a small portfolio, using shared resources with state-of-the-art technology may be the only financially viable outsourced solution.
This approach to having facilities services for the portfolio provided by part-time resources may work for some periods during the year, but may be challenging when relocations to new premises are required. This period tends to be an intense time for all involved and particularly the facilities coordinator – especially when a number of relocations coincide over the same period. The financial analysis is unlikely to indicate cost savings.
The assessment of the outsourcing of lease management and negotiations generally ends up with similar outcomes. The successful outsourcing of the management of a portfolio of leases starts with a robust interactive lease management system, with automatic reminders of critical lease dates, such as rent reviews, options and termination dates.
Although significantly better than Excel spreadsheets, these come at a cost. Service providers can cost- effectively use their system across a number of client portfolios, but there will be a cost per lease for implementation and ongoing updates.
The costs of outsourcing of lease negotiations related to new premises, rent reviews and options, tends to be more complex. Contracting to local commercial agents with the owner of the property paying a commission may be considered a ‘free’ service. But, this approach may cost more.
The agent’s loyalty is to the landlord, with a key objective of getting a deal done quickly with little focus on getting the ‘best’ deal for the tenant. Over the lease term, a few dollars per square metre resulting from a lax lease negotiation is usually significantly more than the cost of an internal employee.
Alternatively, if lease negotiations are outsourced to tenant representatives, the cost is usually in a range of $5000 to $7500 per ‘small’ lease and significantly more for larger leases. In a portfolio of leases, the aggregate cost across the portfolio – even if on average leases expire every three to five years – will likely be significantly more than employing a full- or part-time internal employer dedicated to the portfolio.
Outsourcing of facilities and leasing services for a small portfolio of leases can provide improved outcomes for organisations that have been slow to implement good practice and adopt support systems. However, they are often marginal in cost saving once a detailed assessment of the real impact has been undertaken.
Often, outsourcing provides underwhelming outcomes – once internal staff loyalties are lost and these smaller outsourced portfolios become relegated to the lower ranks of importance below the larger outsourced portfolios – and reality sets in.
Rodney Timm is the director of Property Beyond.