Changing Corporate Procurement Practices and their Impact on CRE
By: Kurt Ochalla Printed in: Expense Management Solutions Newsletter
January 2012
Changing Corporate Procurement Practices and their Impact on CRE
In a recent CoreNet Global RealAdvantage workshop, Michele Flynn, President of Expense Management Solutions, Karen Pritchard, Vice President and Director of Real Estate for Wellington Management Company, and Don Conover, Executive Vice President of Global Site Strategy, Operations and Global Procurement Services led a discussion on major changes in corporate procurement practices and their impact on real estate services delivery. The following is a brief synopsis of the discussion.
In the “new economy” we see more headlines highlighting economic, social or geographic crises in a thirty day period than we would have historically seen in several years. Government regulators, shareholders, financial auditors and customers are holding companies accountable for their own behavior, as well as that of their supply chain to a degree never before seen. As a result, the role of procurement has changed significantly. Historically, procurement was responsible for supporting the acquisition of goods and services at an acceptable price in support of business needs. Today, procurement plays a far greater role.
According to a survey by the World Economic Forum and Fleishman-Hillard, 60% of chief executives said they believed corporate brand and reputation represented more than 40% of their company's market capitalization. In reality any issues that arise with a company’s service providers are a reflection of the company and affect their reputation in the market, and therefore their market capitalization. For many procurement departments their role is to “protect the brand” through effective management of the supply chain and to potentially contribute to the top line profitability of the firm by ensuring optimization of capital flows and integrating suppliers effectively into the revenue generation activities of the firm.
How does this impact real estate?
For most real estate organizations, the old way of procuring services was relatively straightforward. The real estate team would determine the volume of goods or services needed, who the potential suppliers were and either direct procurement to issue a bid, or negotiate the arrangement themselves with limited procurement involvement. Decisions were based on a combination of cost and relationships and the CRE executive was the primary decision maker.
In the new economy, every aspect of an organization is under significant scrutiny. As a result, the sheer number of internal stakeholders involved in selecting outsourced service providers has increased to satisfy heightened compliance requirements and mitigate risks. No longer are decisions made solely by CRE, as Finance, IT, Compliance, Risk Management, HR and others now have a seat at the table.
Second, there are implications beyond just cost. Nowhere is this more evident than in the $11 million fine paid by Wal-Mart in the federal probe into their contractors’ practice of using illegal immigrants as janitors. The four-year long Department of Justice investigation followed an October 2003 raid spanning 21 states and 60 stores that led to the arrest of 245 allegedly illegal immigrants among the company’s floor-cleaning contractors. In addition, 12 companies that provided janitorial services to Wal-Mart paid $4 million in fines and pled guilty to criminal immigration charges.
This is a classic example of how ineffective 3rd party management can generate significant financial pain and cause substantial damage to a company’s brand. One can easily see the overall impact on the real estate industry is significant as more and more organizations outsource both non-core and core real estate functions to third parties.
Procurement’s New Role
Today, procurement by definition must be more fully integrated with the business and support functions such as real estate in order to protect the brand and achieve the corporate goals. A key strategy for many is to provide a strong central core team that ensures process, tools, skills, relationships, and metrics are in place to enable the operating teams to manage third parties effectively.
As noted in Image 2, historically, the goals and objectives of real estate and procurement may not have always been aligned. Moving forward the two groups need to work collaboratively to procure real estate services that will satisfy the needs of the real estate team, and enable procurement to satisfy the critical requirements for managing and mitigating risks raised by the use of third parties.
Implications Going Forward
The implications of this new order impact more than just the internal real estate teams. The rules have changed for service providers as well. Both sides need to respect the procurement process and be disciplined about their interactions. Service Providers must understand all the players at the table, and strive to satisfy their various needs. CREs need to work within the framework, own the decision and educate procurement relative to the unique aspects of real estate services. Other important things to consider are:
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Service Providers
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Corporate Real Estate
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The Bottom Line
The recent economic crisis has elevated awareness of the risks and challenges of managing third parties to senior management in the organization. Given that real estate is often the second or third largest spend in an organization and a heavy user of third parties to deliver services, CRE and Procurement teams will need to be well integrated and collaborate effectively to achieve desired outcomes. Teams should develop shared goals and objectives and be open to suggestions that will optimize both cost and service delivery. Each should contribute and value their respective strengths in the process. Service providers must become aware of the new players involved in the decision-making and expect more stringent requirements during the procurement process. The bottom line is:
Procurement is here to stay
Collaboration = Success!
Kurt Ochalla is the director for Expense Management Solutions’ real estate practice. He specializes in operational assessments, sourcing initiatives and contract reviews with a focus on business process improvement, enterprise cost reduction, 3rd party performance management, and CRE organization design. Kurt can be reached at Ochalla@expensemanagement.com.
Expense Management Solutions is a global leader in the “next generation” of management strategies and solutions for procurement, 3rd party management and corporate real estate functions. EMS partners with our clients to define, design and deliver business solutions to address complex business issues, provide value beyond cost savings and maximize the value of 3rd party relationships. We have worked with over 90 of the world’s largest organizations such as Microsoft, CIGNA, Kimberly-Clark, State Street, Ericsson and the Federal Reserve Bank to deliver more than $1 Billion dollars in savings. To learn more please contact us today at (508) 460-7014 or solutions@expensemanagement.com
