Think Global – Developing a Sourcing Strategy for Real Estate Service Provision
By: Michele Flynn, President, EMS Printed in: CRE Leader
In the last few years the term globalization has flooded the press. The explosion of technology, which has enabled the dissemination of work to almost anywhere in the world, has caused many corporate real estate groups to reevaluate how best to deliver services globally, to reduce costs, enrich service levels, increase consistency, enhance reporting and transparency and improve flexibility. While a successful execution of a global sourcing initiative can meet these objectives, it is a complex process.
Unlike a local or regional sourcing strategy, which begins with the establishment of a baseline and flows through to tracking performance and managing suppliers, development of a global sourcing strategy is complicated by distance, geography, culture, currency, language, laws and regulations, and time.
Time and Distance
Most successful sourcing initiatives depend on the involvement of a cross-functional team with appropriate representation from impacted areas and functions. By definition, a team servicing the globe, vested with the responsibility to acquire, manage or dispose of physical assets in every region, will likely have representatives whose daily operating hours encompass all twenty four hours on the clock. Something as simple as a weekly team meeting becomes a balancing act of logistics and compromise.
Imagine Manhattan from a New Yorker’s point of view as often depicted in caricature maps of the United States; Manhattan is drawn on a large scale and everything west of the Hudson is made tiny, seemingly irrelevant. Not unlike many Americans who cannot conceive of the geographic implications of managing real estate in different areas of the globe. Corporations define one region as Asia/Pac (Japan, Indonesia and Australia), with little thought about the 10 hours it can take to fly from Tokyo to Jakarta or 13 hours to fly from Jakarta to Sydney.
Culture
Defining service level expectations is further complicated by differing cultures and different laws and regulations. Tasks that are the norm or required by law in the United States may be illegal in other countries. In many countries there are no standard codifications or specifications of building products, which limits an organization’s ability to move toward the standardization of services. Pricing strategies and deal structures become geometrically more complex as regulations, tax structures and currency rules of different countries are considered. Whether the services are to be priced and paid for “in-country” or priced on a regional basis in a consistent currency, is only one of a myriad of critical decisions to be made.
Global Supplier Capabilities
Identifying qualified suppliers is key to developing an appropriate sourcing strategy and presents additional challenges on a global level. The supplier community in Europe, Asia and South America is far more fragmented than in the United States. In many developing areas of the world there may not even be suppliers capable of delivering desired services in a specified manner. While supplier capabilities in many of these markets are increasing, many suppliers are geographically limited and provide functional expertise in narrow bands such as facilities, transactions, and design. Additionally, suppliers offer little in the way of technology to support utilization of a single supplier across multiple markets. This is not to suggest that there are no qualified, talented suppliers in other countries, but merely that global solutions will likely require multiple providers, as many of the best-in-class local suppliers are truly local.
Another consideration is that current service delivery methodologies vary widely around the globe. Many organizations still deliver core facility management services with heavily unionized, internal staff, that belong to integrated unions also representing production and manufacturing staff. First generation outsourcing initiatives often require lengthy negotiations with unions, labor or work councils. Negotiations with local and federal governments may also be required. The United States’ right to work concept is foreign to many countries. As a result, timeframes can extend well beyond initial schedules. Plans to implement a single strategy globally can be derailed and cross-regional leveraging severely limited.
Development Process
At the outset, an organization developing a global strategy should define and prioritize drivers for the initiative. Drivers are similar for many organizations and may include desires to reduce costs, improve service levels, rationalize the supplier base, increase the consistency of service delivery across multiple geographies, increase reporting and data transparency and increase standardization. Organizations may also want to be able to benchmark effectively and increase flexibility and adaptability. The sourcing team must decide which drivers are most important and which may have to be sacrificed.
The team can then define the functions and tasks to be included within the sourcing initiative. An organization must delineate activities performed by each area under review and determine which activities should remain internal, which can be out-tasked on an ad-hoc or as needed basis, and which should be subject to a comprehensive outsourcing arrangement.
A straightforward application of a lens similar to the one above, when applied to an organization, will generate the next step in the sourcing strategy – scope definition. The following example reflects the results of one organization’s assessment:
Before finalization of the sourcing plan you must assess and define internal realities. What are the financial expectations you need to satisfy? Who will make the final decisions (purchasing, central real estate group, regional teams, business units)? How will you structure the ultimate arrangement relative to the entity signing the deal - currency and how the contracts need to be drafted? What will your internal regional/global management structure entail?
As with any sourcing initiative, it is important to know the market. The reality of the global marketplace for real estate means the team will need to become familiar with a myriad of players on a regional level and by specific functional expertise. The desire to utilize fewer providers may only be accomplished if you are willing to invest in growing a supplier into your target markets or functional areas.
The plan can be developed from the information you gather. It should address the structure of the approach – regional, functional or fully integrated; definition of the geographic regions you wish to bid – Americas, EMEA and APAC or others; the planned timeline – simultaneous award, staggered or phased over multiple months; and the scope of services to be included.
How your plan is designed will impact the level of effort required to bid the project. It will drive the number of bidders, the complexity of the pricing model, the level of analysis required at the back end, as well as the number of contracts to be negotiated and relationships to be managed.
Key Points
As you progress through the strategy phase balance your desire for gathering comprehensive information with the recognition that the complexity of the bid can quickly spin out of control. The number of distinct services, the number of assets, the level of specificity within the bid to be priced and the number of currencies utilized will each increase complexity geometrically. Other key points:
- Keep in mind that best of breed point solutions, while potentially superior, will result in significant work to transition to and manage multiple suppliers. Don’t set unrealistic timelines. It will take far longer than you think.
- Don’t be afraid to make new ground. Just because it has not been done before, does not mean you can not do it. At the same time, make sure that your risk profile is well matched with the risk of the ultimate solution.
- Ensure that you have sufficient and qualified resources to support the initiative. Employ a legal team with experience outsourcing comparable functions on a global basis. They should understand that the goal is to make the deal work.
- Establish your baseline before you begin. When the results come in, the only way you can prove savings or even validate that the bidders understand the bid is to compare it to current costs.
- Involve the finance team early. Currency and corporate structure both have a huge impact on what you can and can not do. During a contract negotiation is not the time to identify that your proposed pricing methodology or SLA is illegal.
- Don’t underestimate the impact of country and culture. Issues of corporate social responsibility and differences in labor rules are fundamental in contracts in these areas.
- Invest the time and resources up-front. Global sourcing is a perfect example of “pay me now or pay me later”. Shortcuts taken early in the process will generate costly delays and overruns at the end of the day.
There is no one right answer. The goal is to achieve the drivers you defined in step one. As these differ for every organization, so too should the solution.
