Real Estate and Procurement Outsourcing: Short Term ...€¦ · No Better Time – For Outsourcing Real Estate and Procurement Functions The current economic climate may actually

Pillsbury Winthrop Shaw Pittman LLP

Real Estate and Procurement Outsourcing: Short Term Opportunity withLong Term Results

No Better Time for the Right Outsourcing Series

June 30, 2009

1 | No Better Time for the Right Outsourcing

About Pillsbury Global Sourcing

More than US$450 billion in completed transactions

Over 20 years’ experience in structuring and implementing complex delivery arrangements

Over 500 transactions across a premier customer base

The most experienced firm in the business – architecting the largest service delivery projects and strategic alliances

No Better Time

The only sourcing advisory firm offering integrated professional services (legal, sourcing, domain, financial & change management)

Guiding clients through the full sourcing lifecycle

Using straight-through processing for speed-to-value

Deploying a unique visual sourcing technique using our patented ValueChain method


John BartonAttorney, Pillsbury Global [email protected](202) 663-8703

Alison TurnbullConsultant, Pillsbury Global [email protected](416) 275-0265

Roger RoyConsultant, Pillsbury Global [email protected](415) 983-1044

Presenting Today


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No Better Time – For Outsourcing Real Estate and Procurement Functions

The current economic climate may actually be an opportune time to consider further sourcing initiatives

Today’s webinar will discussCurrent opportunities for achieving near-term savings through real estate and procurement outsourcing Lessons learned and issues to consider when evaluating and executing against these opportunities

We are believers in, but not boosters of, the outsourcing industry. If our clients’ needscannot be met by the outsourcing model, we will tell them so. However, we are of the opinion

that the current economic environment could represent an unusual opportunityfor buyers and providers of outsourced services.


Agenda

Real Estate OutsourcingDefinedSavings Opportunities – Near Term and Longer TermLessons Learned and Keys to Achieving Savings

Procurement Outsourcing Value Proposition and TrendsCurrent Market Conditions and Recent Case StudiesLessons Learned


Real Estate Services Outsourcing

Facilities MaintenanceBuilding systems monitoring and maintenance

Building engineering

Small moves and project management

Custodial and waste management

Landscaping / snow removal

Physical security

Food Services

Office Services

Energy Management

Project ManagementMajor moves

Large project planning and execution

Occupancy planning

Architectural and interior design

Construction management

Transaction / Lease ManagementLeasing and sale/purchase transactions

Lease administration

Strategic portfolio planning

Property tax appeals

Almost every company has “out-tasked” many Real Estate activities, but far fewer have taken advantage of outsourcing all of a sub-domain or the entire domain.


Real Estate Savings

While Portfolio and Space Optimization usually offer the largest long-term cost savings, Cost Optimization through Facilities Management Outsourcing (FMO) can produce significant near term savings and align the delivery to support implementation of Portfolio and Space Optimization initiatives.

time

savi

ngs

Delivery

Space

Portfolio

Corporate Real Estate groups are focusing on reducing total occupancy costs through:

Portfolio Optimization (reducing the number of sites)

Space Optimization (increasing the efficient use of workspace)

Delivery Optimization (reducing the cost of operational delivery)


Real Estate – Sources of Near Term SavingsFacilities Management Outsourcing

Leverage supplier technology to right-size staffingRe-balance dedicated and contractor staffingProcurement leverage on sub-contractors and suppliersImproved expense information and spend managementCross-client and cross-supplier labor sharingSingular focus of supplier (savings goal alignment) and supplier best practices

Project Management OutsourcingFor existing FM/PM deal, consider treating “dedicated PM” like FM resources from a pricing perspectiveAvoid “percent of cost” method of PM pricing

Transaction Management OutsourcingRefunds on transaction commissions

old news, but some still don’t do this at all…do you have the right split for the risk?

Evaluate the balance of commissions paying for resources v. direct labor reimbursement and commission sharing


Budgets and capital spending decisions are not centrally managed

Services and materials are not centrally (or regionally) procured

Incentives are not aligned between providers and the customer in existing outsourcing contracts

Services are “out-tasked” v. outsourced and disaggregated within regions or businesses

Facilities management functions are blended into other site functions (e.g., administrative services, IT, HR etc.)

Performance management lacks robust quality measures and training on best practices

Labor sourcing decisions limited by local staffing make-up and availability

Management information systems are inadequate, untimely and/or non-existent

Site planning information is not electronically captured

Real Estate – Sources of Near Term Savings

Significant Delivery Optimization savings from FMO can usually be achieved if the current environment has several of the following characteristics:


Deal Structure is Key to Savings Realization

Ts and Cs that create and maintain alignment of risk with parties operational and financial goals

Clearly defined scope of services (e.g., business, site, building)

Clearly defined, objective performance metrics

Open book pricing

Savings commitments with clear definition and process

Meaningful fees at risk and bonus potential for Supplier

See further discussion of Real Estate Outsourcing contract structure and best practices at: http://www.pillsburylaw.com/index.cfm?pageid=36&itemid=5913


Open Book Pricing – Lessons Learned

Basic StructureManagement Fee Reimbursement for Supplier direct labor (salary, benefits, bonus)Pass-through of third party costs without mark-up

Common Friction PointsManagement fees calculated as a percentage of cost or mark-up on laborSupplier Overhead – Included in the management fee or reimbursable?Supplier licensing and “click charges” – IT, call center, accountingBenefits upliftsAdditional mark-ups for PM and specialized resourcesReimbursement of supplier affiliate chargesInefficient allocation of dedicated and variable resourcesTravel and long distance commuting by account management teams


Savings Commitments – Basic Structure

Deal structure allows for real gain sharing Pricing is open book so actual savings can be measured

Cost savings targets established for each year of the termTargets generally measure P&L savingsTargets can be fixed $ amounts or % against operating expense budgetSavings measured on initiative-by-initiative basisCredit for savings in first 12 months of initiative only

Suppliers will place substantial fees at risk20 to 50% of total fee at risk for cost savings and other KPIsGuarantee of 1st year savings in limited circumstances

Supplier gain-share opportunities% of savings achieved above targets% of savings from sourcing for out-of-scope activities


Savings Commitments - Lessons Learned

Take control of the budget and authority to spendAlign business owners on RE objectivesClear definition of “savings” is key – FM run-rate vs. cost avoidanceMeasure on an initiative-by-initiative basis against annual targetsSpecify how FX and inflation impact savings commitmentsImportance of accurate baseline spending and operational metricsReductions in service requirements or demand do not count as “savings”At-risk amounts and bonus potential must be aligned with company culture and prioritiesAvoid micro-management, but don’t check out either – mutually assured successContract terms should preserve flexibility and leverage


Our Approach

Data Gathering – balancing speed and accuracy

Suppliers – pre screen suppliers and create supplier demand

Efficient RFP process – what matters, what differentiates

Matching supplier solution to client need…minimize custom delivery

Ensure structure for long term relationship alignment is not compromised


Positioning for Long-Term Savings Success

Leverage supplier FMO/PMO systems platform to gather information required for effective space and portfolio management

Feet on the street data collectionEyes and ears of supplier resources with narrow focusPlatforms generally far surpass systems clients can afford or will invest in

Leverage supplier expert resources for strategy supportIn the right circumstances, some limited expertise can be “borrowed”If significant help is required, relationship leverage can result is better pricing

Leverage the reality that the biggest client savings opportunity is in space…and biggest supplier revenue opportunity is in space (at least in the US)

Ensure you also share in the revenue opportunity, not just the spending reduction


Procurement (Source-to-Pay) Outsourcing

Value PropositionPotential savings from S2P outsourcing can be significantly greater than other domains

Savings are typically 2x - 3x greater than the cost of the deal (ROI)

Labor arbitrage component is typically much smaller

Since local, on-shore resources / expertise is required for strategic sourcing

Most companies are “under-invested” in procurement which often makesthe S2P business case more difficult to justify

Need to look at opportunity cost of implementing such a program internally

Current Trends / ConsiderationsExpansion of F&A / transaction processing deals to include sourcing & category management

Significant additional value

Technology is an enabler, but savings can be attained regardless of the platformFinance-led (CFO) procurement initiativesFocus on “realized” savings as opposed to “identified” savings“Gainshare” is more often associated with

sourcing only (consulting-type) arrangements

And even then, is typically limited/capped


Procurement Outsourcing

Service Providers are Responding to the Economic Challenges

There is a renewed focus on creating commercial structures that are cash flow positive in Y1

Service providers are adjusting their offerings to provide customers with more flexible solutions

“Pilots”, subset of categories and/or geographies

Some service providers guarantee that returns will exceed fees

Other service providers amortizing transition fees into years 2+ of the contract

Positive impact on client cash flow in year 1Accounting treatment varies according to internal / external auditor views


Procurement OutsourcingCompanies are using procurement outsourcing as a lever to make reductions in external expenditures. Recent procurement outsourcing deals are expected to drive multi-million dollar savings programs…

Case Study 3: Global Technology CompanyExpanded original F&A scope to include not only procurement operations, but full source-to-pay

Global deal – NA, Europe & Asia

Case Study 1: Global Pharmaceutical Company

Finance initiated program to reduce costs and drive efficiencies

Outsourced source-to-pay process in NA

Leveraged service provider’s procurement infrastructure to support continued growth in NA

Case Study 2: Consumer Products CompanyMulti-tower outsourcing deal including Procurement (S2P), F&A and ADM

Expecting significant $ savings over the life of the contract


BPO Procurement Key Lessons Learned

Spend BaselinesAccurate and detailed spend analysis is key to defining baselines which havea significant impact on service provider pricing and delivery structureRecommendation: Invest time and resources in completing a thorough spend analysis

Savings MeasurementMutual understanding and agreement on savings measurement methodology is key to value proposition and comparison between service providersRecommendation: Request clear definitions of how savings are measured and calculated early in sourcing process

TransformationOutsourcing procurement usually involves significant process transformationBut, client/service provider roles, responsibilities and resource requirements are often not clearly definedRecommendation: Invest time in developing detailed transformation plan and assign appropriate resources pre-contract signing


Procurement

If your company has significant savings targets and/or lack of key category expertiseConsider evaluating build vs. buy scenarios to manage indirect expenditures

If you have already outsourced parts of Procurement (some categories, operations, etc.)

Consider other Procurement activities which are higher up the value chain These can easily be added to existing contracts

If you have already outsourced other domains (FAO, IT, HR, etc.) and incumbent Service Provider has Procurement capabilities

Consider adding to the existing scopeLeverage existing contract documents (MSA, etc.) and add new SOW & SLA schedule

If you have not yet ventured into the outsourcing spaceConsider potential Procurement scope and develop a business caseExplore a low risk starting point

{ }Pillsbury would be pleased to assist with the evaluation and execution of any of these opportunities

No Better Time Procurement Opportunities For Consideration


Questions


Final Upcoming Session

July 14 M&A – Business Continuity and Cost Effective Operations through Outsourcing

Pillsbury Winthrop Shaw Pittman LLP

Real Estate and Procurement Outsourcing: Short Term Opportunity withLong Term Results

No Better Time for the Right Outsourcing Series

June 30, 2009

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Real Estate and Procurement Outsourcing: Short Term ...€¦ · No Better Time – For Outsourcing Real Estate and Procurement Functions The current economic climate may actually